UC-NRLF 


B   ^   512  33fi 


lyACTookkeeping 

awrf  ACCOUNTING 
Complete 


LYONS  AND  CARNAHAN 


GIFT  OF 


LYONS'  BOOKKEEPING 
AND  ACCOUNTING 


BY 

J.  A.  LYONS 

AND 

OLIVER  S.  SMITH 


COPYRIGHT  1920 


LYONS  &  CARNAHAN 
CHICAGO  NEW  YORK 


PREFACE  HP6^(o3i^ 

The  tendency  of  modern  Courses  in  Commerce  is  to  study  business  and  the  various 
relations  which  grow  out  of  business  transactions;  to  understand  credit  and  the  things 
which  affect  credit  relations;  and  to  know  the  effect  upon  a  business  of  certain  well-defined 
economic  principles. 

Most  educators  agree  that  these  ends  may  be  attained  through  the  medium  of  a 
bookkeeping  course  better  than  in  any  other  way;  and,  while  the  general  principles  of 
business  are  being  studied,  it  must  not  be  forgotten  that  bookkeeping  still  remains  a  sub- 
ject that  is  studied  largely  for  practical  purposes.  Therefore,  a  course  in  bookkeeping 
should  do  at  least  two  things  for  a  student. 

First,  it  should  equip  him  to  take  a  place  in  business  and  enable  him  to  fill  that  place 
intelligently.  Second,  it  should  give  him  an  equipment  that  is  much  broader,  and,  in  a 
sense,  much  more  important, — the  power  to  analyze,  to  interpret,  and  to  determine  the 
results  that  are  produced  by  business  transactions,  relations  and  conditions. 

It  is  entirely  proper  that  some  students  should  desire  to  prepare  themselves  to  become 

bookkeepers,  but  there  are  many  more  who  will  desire  to  study  bookkeeping  because  of 

the  benefi+  in  after-life  to  be  derived  from  such  a  course.    Therefore,  the  bookkeeping 

course  should  be  not  only  a  study  of  office  routine  and  business  papers,  but  also  a  study 

1- ;:,  \i2)i  the  constvuction  and  the  interpretation  of  accounts. 

No  one  has  ever  given  a  satisfactory  reason  why  sound  accounting  practices  should 
not  be  taught  from  the  first;  it  certainly  is  no  more  difficult  to  do  this  than  it  is  to  teach 
practices  that  are  not  recognized  by  modern  accountancy. 

In  the  preparation  of  this  textbook  the  authors  set  themselves  the  task  of  presenting, 
from  the  outset,  sound  accounting  principles,  and  of  making  the  course  cumulative  and 
the  method  inductive.  Part  I  embraces  a  study  of  the  following  basic  accounts :  Personal, 
Proprietor's  Capital,  Profit  &  Loss,  Expense,  Purchases,  Inventory,  Sales  and  Cash,  also 
a  study  of  the  purchases  book,  sales  book,  cash  book  and  journal.  Part  II  begins  the  use 
of  short  sets  in  which  these  basic  accounts  together  with  the  books  of  original  entry  are 
constructed  from  related  business  transactions,  and  here  also  is  introduced  the  prepara- 
tion of  the  Profit  and  Loss  Statement  and  the  Balance  Sheet.  Additional  accounts  are 
then  studied  after  which  a  short  set  is  presented  that  compels  the  use  of  all  accounts  that 
have  been  studied  thus  far;  etc.  Much  collateral  work  such  as  the  analysis  of  accounts, 
preparation  of  comparative  statements,  etc.,  is  explained,  and  the  student  is  required  to 
do  similar  work  from  the  accounts  and  books  which  he  has  prepared. 

Part  III  embraces  a  study  of  the  Balance  Sheet,  Trading  and  Profit  and  Loss  State- 
ment, and  bookkeeping  devices,  such  as  special  columns,  controlling  accounts,  memorandum 
books,  etc. 

Part  IV  presents  an  intensive  study  of  a  special  business — Wholesale  Grocery — and 
requires  the  use  of  almost  all  the  books,  accounts,  and  papers,  that  have  been  previously 
discussed  in  the  course. 

Business  papers  likewise  have  been  segregated.  In  Set  IV,  the  simplest  "outgoing" 
papers  are  introduced  and  their  forms  and  functions  are  explained.  However,  the  use 
of  any  business  papers  in  Set  IV  is  optional. 

In  Set  VI  all  business  papers,  which  are  incidental  to  a  wholesale  business,  are  intro- 
duced, and  the  transactions  are  so  arranged  that  the  use  of  the  "incoming"  papers  is  com- 
pulsory; the  entries  occasioned  by  these  papers  can  not  be  made  unless  the  student  reads 
the  papers;  thus,  he  learns  to  determine  the  proper  entries  by  an  examination  of  the  papers. 


CONTENTS 

PART  I 
Basic  Accounts — Theik  Construction  and  Meaning 


PAGE 


Introduction — Personal  Accounts — Accounts  Receivable — Balancing  and  Ruling  Accounts  Receivable 
— Accounts  Payable — Balancing  and  Ruling  Accounts  Payable — Proprietor's  Account — Balanc- 
ing and  Ruling  Proprietor's  Accounts — Partnership — Profit  &  Loss  Account — General  Expense 
Account — Simple  Business  Forms;  Order  for  Goods,  Invoice,  Credit  Memorandum,  Inventory, 
Statement  of  Account — Merchandise  Accounts;  Merchandise  Purchases  Account,  Merchandise 
Inventory  Account,  Merchandise  Sales  Account — Cost  of  Goods  Sold — Gross  Profit — Books  of 
Original  Entry;  Purchases  Book,  Posting  the  Purchases  Book,  Trial  Balance;  Sales  Book,  Posting 
the  Sales  Book,  Trial  Balance — Cash  Account — Balancing  and  Ruling  Cash  Account — Cash 
Book,  Posting  the  Cash  Book,  Trial  Balance — The  Journal:  Posting  the  Journal;  Use  of  Journal 
Illustrated;  Use  of  Journal  in  Opening  Books;  Use  of  Journal  in  Making  Corrections,  Adjustments 
and  Recording  Transactions — General  Rule  for  Debit  and  Credit — Correction  of  Errors;  In  Books 
of  Original  Entry,  In  a  Ledger — Closing  the  Ledger — Closing  an  Account — Ruling  a  Closed 
Account — Closing  Merchandise  I*urchase3  Account — Closing  Merchandise  Sales  Account — 
Closing  General  Expense  Account — Closing  Profit  &  Loss  Account — Closing  Diagram 1-58 


PART  II 
Bookkeeping  Practicb 

Set  I;  Coal  Business — Memoranda  of  Transactions — How  to  Close  the  Work  at  the  End  of  a  Month — 
Illustrative  Ledger — How  to  Locate  Errors  in  Trial  Balances — How  to  Determine  Profit  and  Loss — 
Form  of  the  Profit  and  Loss  Statement — How  to  Determine  Net  Capital  of  Proprietor — Form  of 
the  Balance  Sheet — To  Prove  Net  Profit  or  Net  Loss — Form  of  Proof  Sheet — Closing  the  Ledger. 
Set  II;  Fruit  and  Produce  Business — Classifying  Accounts  in  the  Ledger — Memoranda  of  Trans- 
actions— To  Forward  the  Sales  Book — Program  for  Closing — Opening  an  Account — Memoranda 
of  Transactions — Program  for  Closing — Statistical  Information — Comparative  Statements; 
Profit  and  Loss,  Balance  Sheet — Distribution  of  Profits — Promissory  Notes;  Notes  Rcceiveable 
Account;  Notes  Payable  Account — Interest  Account — Proprietor's  or  Partner's  Personal  Account 
— Set  III;  Hardware  Business — Memoranda  of  Transactions — Program  for  Closing — Memoranda 
of  Transactions — Dissolution  of  a  Partnership — Program  for  Closing — How  to  Analyze  an  Account 
— Property  Used  in  the  Business — Office  Equipment  Account — Delivery  Equipment  Account — 
Some  Accounts  Which  May  Contain  Deferred  Charges:  Insurance  Account;  Expenses  Classified ; 
General  Expense  Group,  Selling  Expense  Group — How  to  Provide  for  Deferred  Expense — Accounts 
AfiFecting  Purchases  and  Sales  Accounts;  Purchases  Discounts  Account,  Sales  Discounts  Account, 
Freight-Out  Account,  Freight-In  Account,  Sales  Rebates  and  Allowances  Account,  Purchases 
Rebates  and  Allowances  Account — Set  IV;  Retail  Piano  Business — Memoranda  of  Transactions — 
Program  for  Closing — Bank  Reconciliation — Memoranda  of  Transactions — Program  for  Closing — 
Trading  Statement — Closing  Diagram — Supplementary  Exercises 59-124 


463236 


CONTENTS— Continued  / 


PART  III 


Bu8iNEi58  Analysis  and  AccotTNTiNG  Devices 

PAGE 

A  Study  of  the  Balance  Sheet;  How  to  Classify  Assets  and  Liabilities;  Arrangement  of  the  Balance 
Sheet;  Availibility  of  Assets  for  Payment  of  Debts;  Forms  of  Balance  Sheet;  How  a  Balance 
Sheet  is  Used  as  an  Aid  in  Financing;  Profits  not  Always  Cash — A  Study  of  the  Trading  and 
Profit  and  Loss  Statement;  Its  Arrangement;  Major  Income  Shown  by  Trading  Statement; 
Classes  of  Expenses;  Other  Incomes;  Affected  by  Improper  Accounting;  How  Transactions 
Affect  the  Business — Accounting  Devices  and  Mechanical  Appliances;  Special  Columns;  Sub- 
sidiary Ledgers;  Controlling  Accounts;  Books  for  Memorandum  Entries;  Loose-Leaf  Books; 
Mechanical  Appliances — Set  V,  Automobile  Agencj';  Special  Columns  in  Set  V;  Memoranda  of 
Transactions;  Adjusting  Entries;  Program  for  Closing. — Recapitidation  of  Books  of  Original 
Entry — Drafts  and  Acceptances;  Sight  Drafts,  Time  Drafts;  Bank  Acceptances;  Trade  Accept- 
ances.— Provision  for  Depreciation  and  Losses;  To  Determine  a  Rate  of  Depreciation;  Depre- 
ciation Account;  Reserve  for  Depreciation  Account;  Loss  on  Accounts  Receivable;  Bad  Debts 
Account;  Reserve  for  Loss  on  Accounts  Receivable;  General  Use  of  Reserves 125-180 


PART  IV 

The  Study  of  a  Particular  Business 

Set  VI;  Wholesale  Accounting  for  Grocery  Business;  Books  Used;  Loose-Leaf  Order  System;  How  an 
Order  is  Handled;  Sales  Binder  and  Recapitulation  Sheets;  Exchange;  Special  Form  for  Accounts 
Receivable  Ledger;  Special  Columns  in  Set  VI;  Memoranda  of  Transactions;  Petty  Cash  Book; 
Stores  Ledger; Departmental  Accounting; Cost  of  Doing  Business; Comparative  Statistics; Charts — 
Real  Estate;  Its  Improvement,  Expenses  and  Income;  Land  and  Buildings  Accounts;  Mortgage 
on  Real  Property;  Depreciation  of  Buildings;  Accounts  During  Construction  of  Building — 
Miscellaneous  Accounts;  Losses  from  Fire;  Contingent  Liabilities;  Installment  Accounts;  Assign- 
ment of  Accounts  Receivable — Supplementary  Exercises;  Direct  Method  of  Closing  a  Ledger; 
Income  Tax  Returns;  Work  Sheet;  Goodwill 181-238 


LYONS^  BOOKKEEPING  AND  ACCOUNTING 

PART  I.     BASIC  ACCOUNTS 
THEIR  CONSTRUCTION  AND  MEANING 


INTRODUCTION 

Business  and  professional  men  find  it  necessary  to  keep  records  of  their  financial 
transactions  to  which  they  may  readily  refer.  These  records  are  known  as  Books  of  Ac- 
count. 

Bookkeeping  is  the  systematic  recording  of  business  transactions  in  books  provided 
for  that  purpose.  Good  bookkeeping  furnishes  the  management  with  any  desired  financial 
information  concerning  the  business,  on  short  notice,  and  results  from  a  good  system  and  a 
competent  bookkeeper. 

The  Terms  Debit  and  Credit,  and  the  fundamental  rules  governing  their  use,  have 
been  handed  down  for  generations.  There  has  been  and  can  be  no  change  in  the  principles 
of  bookkeeping  but  there  has  been  decided  improvement  in  the  application  of  these  princi- 
ples to  the  records  of  modern  business. 

The  Owner  or  proprietor  of  the  business,  no  matter  what  its  nature,  is  sometimes 
referred  to  in  this  textbook  as  the  Merchant;  more  frequently  persons,  firms  or  corpora- 
tions are  mentioned  by  name  as  the  owners  or  proprietors. 

The  Merchant,  selling  his  goods  on  time,  keeps  a  record  of  the  charges  to  each  custo- 
mer; also  of  other  facts  such  as  goods  returned,  allowances  made  (to)  each  customer  and 
payments  made  by  him. 

An  Account  is  the  name  given  to  the  record  of  related  transactions  and  the  heading 
under  which  they  are  placed  in  the  ledger. 

The  Balance  of  an  account  is  the  difference  between  the  totals  of  its  amount  columns. 
If  the  debit  side  is  larger  the  difference  is  known  as  a  debit  balance,  but  if  the  credit  side  is 
larger  the  difference  is  known  as  a  credit  balance. 


PERSONAL  ACCOUNTS 

Personal  Accounts  are  accounts  kept  with  persons,  firms,  corporations  and  associations. 
They  are  divided  into  two  classes:  Accounts  Receivable  and  Accounts  Payable. 

An  Account  Receivable  is  a  Personal  account  the  balance  of  which  is  due  the  mer- 
chant, that  is,  an  account  with  a  customer  to  whom  he  sells  goods  on  time. 

An  Account  Payable  is  a  Personal  account  owed  by  the  merchant,  that  is,  an  account 
with  a  creditor  from  whom  he  purchases  goods  on  time. 

Submit  written  answers  to  the  following: 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


PERSONAL  ACCOUNT  PROBLEMS 


1.  During  January  a  merchant  sold  J.  R.  Hilton  on  account  bills  of  goods  of  the  following  amounts: 
$23.41,  $12.76,  $11.64,  $12,83,  $22.42,  $14.58.  How  much  did  Mr.  Hilton  owe  at  the  end  of  the  month? 
(a)  Is  the  amount  owed  by  J.  R.  Hilton  to  the  merchant  an  account  receivable  or  an  account  payable  on 
the  merchant's  books?     (b)  Is  it  an  account  receivable  or  an  account  payable  on  Mr.  Hilton's  books? 

2.  During  February  The  Original  Dry  Goods  Co.  purchased  the  following  bills  of  goods  on  account 
from  MarshaU  Field  &  Co :  Feb.  1,  $230.00;  Feb.  10,  $300.00;  Feb.  20,  $500.75;  Feb.  27,  $1,575.10.  What 
was  the  total  charge  on  Marshall  Field  &  Co's.  books  to  the  account  of  The  Original  Dry  Goods  Co.? 
(a)  Should  the  books  of  The  Original  Dry  Goods  Co.  show  a  credit  of  the  same  amount  to  MarshaU  Field  & 
Co's  accoimt?  (b)  Is  the  amount  due  by  The  Original  Dry  Goods  Co.  an  account  receivable  or  an  ac- 
count payable  on  the  books  of  Marshall  Field  &  Co.?  (c)  Is  the  amount  owed  Marshall  Field  &  Co. 
an  account  receivable  or  an  account  payable  on  the  books  of  The  Original  Dry  Goods  Co.? 

3.  On  March  1,  H.  K.  James  owed  the  City  Dry  Goods  Co.  <S27.50.  During  the  month  the  sales  to 
Mr.  James,  not  paid  for  at  the  time,  were:  $4.34,  $5.28,$10.26,  $8.92,  $12.20,  $8.96,  $12.58  and  $7.26.  How 
much  did  he  owe  March  31,  no  payments  having  been  made?  (a)  Is  the  account  against  H.  K.  James 
showing  the  amount  owed  by  him  an  account  receivable  or  an  account  payable  on  the  books  of  the  City 
Dry  Goods  Co.? 

4.  April  1,  H.  K.  James  owed  the  amount  determined  in  the  previous  problem.  During  April  the 
City  Dry  Goods  Co.  sold  him  the  following  bills  of  goods  on  account:  $12.20,  $5.00,  $8.75,  $2.36,  $5.20, 
$6.50,  $12.70.  On  April  10,  H.  K.  James  paid  his  March  account  in  full.  How  much  was  due  the  City  Dry 
Goods  Co.  April  30? 

6.  May  1,  King  &  Smith  owed  the  Homer  Hardware  Co.  $425.50.  During  May,  King  &  Smith 
bought  from  the  same  company  goods  as  follows:  May  10,  $350.90;  May  20,  $160.00;  May  27,  $15.40. 
The  payments  made  during  the  month  were:  May  5,  check  $125.50;  May  10,  check  $300.00.  What  was 
the  balance  due  the  Homer  Hardware  Co.  May  31?  (a)  Is  the  amount  due  the  Homer  Hardware  Co. 
an  account  receivable  on  their  books?  (b)  Why?  (c)  Is  the  amount  owed  by  King  &  Smith  an  account 
payable  on  their  books?     (d)    Why? 

6.  June  1,  King  «&;  Smith  owed  the  Homer  Hardware  Co.  the  balance  shown  by  the  previous  problem. 
During  June  the  sales  to  King  &  Smith  by  the  same  company  on  account  were  $300.00,  $261.51  and  $91.50. 
On  June  5  they  paid  the  amount  owed  on  June  1  less  an  allowance  of  $15.30  for  goods  returned.  (Give 
them  credit  for  goods  returned.)  What  was  the  debit  balance  against  Smith  &  King  on  the  books  of  the 
Homer  Hardware  Co.,  June  30?  (a)  What  was  the  credit  balance  to  the  Homer  Hardware  Co.  on  the 
books  of  King  &  Smith,  June  30?  (b)  Is  the  account  of  King  &  Smith  on  the  books  of  the  Homer  Hard- 
ware Co.,  a  customer's  account?  (c)  Why?  (d)  Is  the  account  of  the  Homer  Hardware  Co.  on  the 
books  of  King  &  Smith  a  creditor's  account?  (e)  Why?  (f)  What  is  the  difference  between  customers 
and  creditors?     (g)     Are  both  personal  accounts? 

ACCOUNTS  RECEIVABLE 

EXERCISE 

The  transactions  assembled  here  represent  an  account  as  it  would  appear  in  a  ledger. 
It  is  the  account  of  W.  B.  Dewey  on  the  ledger  of  the  Homer  Hardware  Co.  which  has 
sold  him  goods. 

The  printed  headings  at  the  top  of  the  account  are  the  names  of  the  different  columns 
generally  used  in  ledgers.    The  illustrative  accounts  that  follow  will  be  in  the  same  form. 

Trace  mentally  each  item  in  this  exercise  to  its  place  in  the  illustrative  account. 

Jan.  1.     The  Homer  Hardware  Co.  sold  W.  B.  Dewey,  Galesburg,  111.,  on  account,  goods  amounting  to 
$230.75. 

2.  Sold  W.  B.  Dewey,  on  account,  goods  amounting  to  $17.50. 

3.  W.  B.  Dewey  gave  his  note  for  $200.00  and  his  check  for  $50.75  in  payment  of  the  bill  of  goods 
sold  him  on  the  1st. 

4.  W.  B.  Dewey  returned  goods  amounting  to  $5.15  for  which  he  was  given  credit. 


PERSONAL  ACCOUNTS  7 

Jan.  5.     Sold  W.  B.  Dewey,  on  account,  goods  amounting  to  $175.50. 

5.  W.  B.  Dewey  claims  an  overcharge  of  S4.50.    This  was  looked  up,  allowed,  and  credit  given  to  him. 

6.  Received  from  W.  B.  Dewey  check  for  $100.00  to  apply  on  account. 


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Just  below  the  heading  "W.  B.  Dewey,"  and  a  little  to  the  right,  is  written  in  a 
smaller  hand  his  address;  in  large  cities  the  street  and  number  also  should  be  written  in 
the  heading  of  the  account. 

The  figures  in  the  folio  columns  refer  to  the  pages  of  the  books  in  which  the  transactions 
were  first  recorded.  The  left  side  of  W.  B.  Dewey's  account  is  the  debit  side,  and  the 
footing  shows  the  total  of  the  sales  to  him.  The  right  side  of  the  account  is  the  credit 
side,  and  the  total  is  the  amount  of  notes,  checks  and  returned  goods  received  from  him, 
plus,  also,  one  item  of  allowance  for  an  overcharge.  The  small  pencil  footings  just  below 
the  last  debit  item  and  the  last  credit  item  give  the  total  of  these  charges  and  credits,  while 
the  small  pencil  figures  on  the  debit  side  at  the  left  of  the  footing  of  the  debit  column  show 
at  a  glance  the  amount  due  from  W.  B.  Dewey.  This  account  on  the  books  of  the  Homer 
Hardware  Co.  is  a  personal  account :  it  is  also  a  customer's  account  and  an  account  receiv- 
able- 


QUESTIONS  ON  W.  B.  DEWEY'S  ACCOUNT 

1.  What  was  the  amount  of  the  sales  to  W.  B.  Dewey  in  Jan.  19-?  2.  Do  debits  and  charges  mean  the 
same  thing  in  this  account  with  W.  B.  Dewey?  3.  "VMiat  was  the  amount  of  the  credits?  4.  How  much 
was  the  balance?  5.  Is  this  balance  the  amount  due  from  W.  B.  Dewey?  6.  Are  all  the  credits  pay- 
ments of  money?  7.  WTiat  is  the  amount  of  credits  given  Mr.  Dewey,  that  does  not  represent  cash? 
8.  What  amoimt  of  cash  has  Dewey  paid?  9.  If  Dewey  should  pay  the  balance  of  his  account,  what 
effect  would  it  have  upon  the  account? 


Purpose.  To  record,  in  the  form  of  accounts,  the  charges  made  to  customers  for  goods 
sold  to  them  on  time  by  a  merchant;  also  the  credits  for  payments,  returned  goods  and 
allowances. 

Method.  Open  an  account  with  the  customer  and  debit  or  charge  this  account  with 
the  sales  to  him.  Credit  the  account  with  payments  of  money  or  notes,  also  with  all 
returned  goods  and  allowances. 


8  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

The  first  step  in  opening  an  account  with  a  person  is  to  write  his  name  and  address 
on  the  ledger  page,  thus: 

W.  B.  Dewey,  Galesburg,  III. 

Result.  The  difference  between  the  two  sides  of  an  account  receivable  is  the  balance 
due  the  merchant.    . 

Observe  carefully  the  ruling  of  this  account  for  it  is  the  ruling  used  in  balancing  all 
accounts.  The  blue  line  on  which  to  draw  the  single  lines  is  the  first  blue  line  below  the 
longer  side  of  the  account.  The  footing  line  on  the  other  side  is  always  on  the  same  blue 
line.  The  footing  lines  cut  the  amount  columns  only.  Notice  that  the  double  red  lines 
are  both  on  the  following  blue  line  and  that  they  cut  all  columns  except  the  two  explanation 
columns.    The  footings  are  always  in  black  and  are  inserted  just  above  the  double  red  lines. 

BALANCING  AND  RULING  ACCOUNTS  RECEIVABLE 

In  certain  instances  it  is  necessary  or  desirable  to  balance  a  personal  account. 

When  the  account  has  covered  all  the  space  allotted  to  it  except  sufficient  space  to 
balance  it — never  more  than  two  lines — it  is  carried  forward  to  another  page,  and  re-opened 
with  the  balance. 

When  the  account  is  long  and  compUcated  and  an  understanding  has  been  reached 
concerning  the  amount  due,  the  account  should  be  balanced. 

At  one  time  it  was  the  custom  to  balance  all  accounts  at  the  end  of  each  month. 

The  bookkeeper  should  not  balance  a  personal  account  unless  some  advantage  is  to 
be  gained  by  doing  so. 

The  foregoing  illustration  shows  the  account  of  W.  B.  Dewey  balanced  and  ruled. 


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Accounts  well  ruled  make  the  books  attractive.  They  may  be  ruled  in  either  red  or 
black  ink,  but  red  is  preferable.  Therefore,  the  bookkeeper  should  always  have  two 
penholders;  one  for  red  ink  and  one  for  black  ink.  These  penholders  should  be  of  different 
colors  and  the  pen  intended  for  red  ink  should  never  be  used  for  black  ink, 


—        -  PERSONAL  ACCOUNTS  9 

QUESTIONS  ON  BALANCING  AND  RULING 

1.  Why  is  "6  Balance  83.35'' written  on  the  credit  side?  2.  Why  are  the  single  red  line  on  the  credit 
side,  and,  the  single  red  line  on  the  debit  side  on  the  same  blue  line?  3.  Why  are  the  double  red  lines  on 
the  credit  side  and  the  double  red  lines  on  the  debit  side  on  the  same  blue  line?  4.  Why  is  "Jan.  6  Bal- 
ance 83.35"  written  on  the  debit  side  under  the  double  ruling?  5.  Why  are  the  totals  between  the  single 
and  double  lines  the  same? 

EXERCISE  II 

Write  up  the  transactions  in  this  exercise  on  ledger  paper,  opening  an  account  with 
another  customer  of  the  Homer  Hardware  Co.,  charging  and  crediting  it  in  accordance 
with  the  method  apphcable  to  personal  accounts  receivable.  The  figures,  such  as  are 
used  in  the  folio  columns  of  W.  B.  Dewey's  account,  are  to  be  omitted  in  this  account. 

Jan.  1.     The  Homer  Hardware  Co.  sold  Martin  A.  Robbins,  a  customer  at  Milwaukee,  Wis.,  on  account, 
goods  amounting  to  $365.25. 

2.  Sold  Martin  A.  Robbins,  on  account,  goods  amounting  to  $49.55. 

3.  Received  of  Martin  A.  Robbins  his  check  in  full  for  goods  sold  him  on  Jan.  1. 

4.  Martin  A.  Robbins  returned  goods  amounting  to  $2.75  for  which  he  was  given  credit. 

5.  Sold  Martin  A.  Robbins,  on  account,  goods  amounting  to  $164.95. 

6.  Received  from  Martin  A.  Robbins  check  covering  charge  to  him  Jan.  2,  less  the  amount  returned 
Jan.  4. 

Foot  the  Martin  A.  Robbins  account  in  pencil,  ascertain  the  balance,  place  it  in 
pencil  on  the  proper  side,  then  balance  and  rule  it.  Write  answers  to  the  following  ques- 
tions and  submit  your  work  for  approval. 

1.  Are  aU  the  people  to  whom  the  Homer  Hardware  Co.  sells  goods  known  as  customers  of  that 
company?  2.  The  manager  asks,  "Does  Martin  A.  Robbins,  Milwaukee,  Wis.,  owe  us  anything?" 
"How  much"?  3.  What  is  a  personal  account?  4.  What  is  an  account  receivable?  5.  Is  Martin  A. 
Robbins'  account  on  the  books  of  the  Homer  Hardware  Co.  both  a  personal  account  and  an  account  re- 
ceivable?    6.     Is  it  a  customer's  account? 

ACCOUNTS  PAYABLE 

EXERCISE  III 

In  Exercise  I,  the  Homer  Hardware  Co.  sold  goods  to  a  customer  on  time  and  kept  an 
account  with  him.  In  the  exercise  following,  the  Homer  Hardware  Co.  buys  goods  of 
others  on  time  and  keeps  accounts  with  them.  The  Pratt  Manufacturing  Co.,  Providence, 
R.  I.,  was  one  of  the  concerns  from  which  they  bought  goods.  Trace  mentally  the  trans- 
actions in  this  exercise  affecting  the  Pratt  Manufacturing  Co.  to  the  illustrative  account 
with  that  company  as  shown  on  the  books  of  the  Homer  Hardware  Co. 

Feb.  1.     The  Homer  Hardware  Co.  bought  of  Pratt  Manufacturing  Co.,  Providence,  R.  I.,  a  bill  of  goods 
amounting  to  $745.65. 

2.  Bought  of  Pratt  Mfg.  Co.  goods  invoiced  at  $392.  50. 

3.  Gave  Pratt  Mfg.  Co.  note  dated  today  and  payable  in  one  month  for  $500.00  to  apply  on  account. 

4.  Bought  of  Pratt  Mfg.  Co.  goods  invoiced  at  $127.45. 

5.  Returned  to  Pratt  Mfg.  Co.  damaged  goods,  invoiced  to  us  at  $32.50,  and  received  a  credit  me- 
orandum  covering  them. 

6.  Bought  of  Pratt  Mfg.  Co.  goods  amounting  to  $85.10. 

7.  Checking  the  goods,  covered  by  the  invoice  of  $85.10,  we  found  a  shortage  amoimting  to  $1.60. 
This  was  reported  to  Pratt  Mfg.  Co.  and  allowed. 


10 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


Feb.  8.     Received  from  Pratt  Mfg.  Co.  goods  invoiced  at  $27.80. 
9.     Bought  of  Pratt  Mfg.  Co.  goods  billed  at  $136.90 
10.    Goods  received  today  from  Pratt  Mfg.  Co.  invoiced  at  $721.25  were  fovmd  in  good  condition  and 

in  accordance  with  our  order.    The  invoice  was  O.  K'd  for  credit  to  their  account. 
15.    Gave  Pratt  Mfg.  Co.  a  check  to  cover  the  credits  to  their  account  of  Feb.  1,  2,  4  and  6,  less  the 
charges  to  date.    Amount  of  check  $816.60. 


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The  parties  to  whom  the  Homer  Hardware  Co.  owes  money  are  known  as  creditors; 
consequently  the  account  with  the  Pratt  Manufacturing  Co.  is  a  creditor's  account,  or 
an  account  paj'^able. 

The  numbers  in  the  foHo  columns  are  the  pages  of  the  books  where  the  transactions 
were  originally  recorded. 

QUESTIONS  ON  PRATT  MANUFACTURING  CO.'S  ACCOUNT 

1.  What  does  the  total  of  the  credit  side  show?  2.  What  does  the  total  of  the  debit  side  show? 
3.  How  much  is  charged  to  Pratt  Manufacturing  Co.  that  is  not  cash?  4.  What  is  the  balance  due  on 
this  account?  5.  Is  it  an  accoimt  payable?  6.  What  effect  would  payment  of  the  balance  have  upon 
this  account? 

Purpose.  To  record,  in  the  form  of  accounts,  the  credits  due  to  the  manufacturers, 
wholesalers  and  jobbers  for  goods  purchased  from  them  on  time  by  a  merchant,  also  the 
charges  for  payments,  returned  goods  and  allowances. 

Method.  Open  an  account  with  the  person,  firm,  corporation  or  association  from 
which  the  merchant  purchases  goods  on  time.  Credit  this  account  with  all  purchases. 
Debit  or  charge  this  account  with  all  payments,  goods  returned  and  allowances. 

Result.  The  difference  between  the  two  sides  of  an  account  payable  is  the  balance 
owed  by  the  merchant. 


BALANCING   AND  RULING   ACCOUNTS  PAYABLE 


What  has  been  said  in  regard  to  ruling  accounts  receivable  applies  also  to  accounts 
payable. 


PERSONAL  ACCOUNTS 


11 


The  following  illustration  shows  the  account  of  the  Pratt  Manufacturing  Co.  ruled. 


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QUESTIONS  ON  RULING 

1.  The  small,  pencil  totals  just  beneath  the  single  red  lines  are  equal.  What  does  this  mean?  2. 
How  would  you  get  the  balance  of  this  account?  3.  In  finding  the  balance  due  the  Pratt  Manufacturing 
Co.  is  it  necessary  to  add  each  side  to  find  the  balance  due  the  Pratt  Manufacturing  Co?  4.  What  is  the 
effect  of  ruling  this  account  at  a  point  where  it  balances? 


EXERCISE  IV 

The  Homer  Hardware  Co.  also  bought  goods  from  Brown  &  Smith,  South  Bend,  Ind. 
Open  an  account  with  that  firm  and  write  it  up,  leaving  out  the  folio  figures  from  the 
transactions,  taken  from  the  books  of  the  Homer  Hardware  Co.  and  shown  in  this  exercise. 
Use  ledger  paper.    Rule  the  account  and  submit  work  for  approval. 


Feb.  1. 

2. 
3. 
4. 


6. 
6. 


The  Homer  Hardware  Co.  bought  of  Brown  &  Smith,  South  Bend,  Ind.  on  account  goods 
invoiced  at  $395.10. 

Bought  goods  on  account  of  the  same  firm  to  the  amount  of  $19.10. 
Gave  a  check  in  payment  for  the  goods  credited  to  Brown  &  Smith's  account  Feb.  1. 
Received  an  invoice  of  goods  from  Brown  &  Smith,  amount  $516.85.     In  checking  the  bill  an 
error  of  $20.00  was  found  in  the  calculations,  the  correct  amount  being  $496.85.    The  correct 
amount  was  credited  to  Brown  &  Smith's  account  and  they  were  advised  of  the  error. 
Paid  Brown  &  Smith  for  the  amount  credited  to  their  account  Feb.  2  and  4. 
Bought  a  bill  of  goods  invoiced  at  $275.65.   The  goods  were  found  to  be  as  ordered,  in  good  con- 
dition and  the  invoice  correct. 
Bought  a  bill  of  goods  on  account  amounting  to  $215.75.     Invoice  correct. 


Answer  the  following  questions: 

The  manager  of  the  Homer  Hardware  Co.  asks:  1.  "Do  we  owe  Brown  &  Smith  anything"?  (a) 
"How  Much"?  (b)  "WTiat  is  the  amount  of  the  goods  bought  of  them  so  far  in  February"?  2.  Is  this 
account  with  Brown  &  Smith  an  account  payable  on  the  books  of  the  Homer  Hardware  Co.?  (a)  Is  it  a 
personal  account?  (b)  Is  it  a  creditor's  account?  3.  Which  side  of  an  account  payable  is  larger,  if 
either?    (a)    Which  side  of  an  account  receivable  is  larger? 


12  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

BOOKKEEPING  ABBREVIATIONS  AND  CONTRACTIONS 

Account Acct.  Folio Fol.  F. 

Balance Bal.  Invoice Inv. 

Bookkeeper Bkpr. . .  Ledger  Folio Led.  Fol.  LF. 

Charge Chg.  , .  Months  of  the  year.  .First  three  letters,  except  May 

Credit Cr.  Manufacturing Mfg. 

Days  of  the  week First  three  letters  Payable Pay. 

Debit Dr.  Receivable Rec. 

Returned Retd. 

Purpose.    To  save  space  and  time. 

Method.    Write  all  abbreviations  and  contractions  in  the  books  without  periods  or 
apostrophes. 


PROPRIETOR'S  ACCOUNT 

Business  is  undertaken  with  the  expectation  of  producing  profits  and  is  successful 
when  the  earnings  exceed  the  expenses,  thus  resulting  in  a  net  profit.  When  the  expenses 
exceed  the  earnings,  the  result  is  a  net  loss.  The  net  profit  or  the  net  loss  is  usually  deter- 
mined annually,  semi-annually,  quarterly  or  monthly,  and  these  are  termed  closing  periods. 

The  Fiscal  Period  or  Fiscal  Year  of  a  business  is  the  time  between  any  two  succeeding 
dates  for  ascertaining  the  gains  and  losses  of  that  business.  This  may  end  on  any  date; 
but  because  the  Federal  Income  Tax  Law  favors  a  year  ending  December  31,  business 
houses  so  far  as  possible  begin  their  fiscal  year  January  1.  The  railroads  constitute  an 
exception  as  the  Interstate  Commerce  Commission  requires  them  to  make  their  annual 
reports  as  at  the  close  of  business  June  30,  each  year. 

When  one  person  owns  a  business,  he  is  known  as  the  owner  or  proprietor.  When 
two  or  more  persons  engage  in  business  under  a  partnership  agreement,  they  are  known 
as  the  partners  and  the  organization  is  known  as  a  partnership  or  firm.  When  a  number 
of  persons  are  organized  under  the  corporation  laws  of  a  state  to  do  business  as  a  corpora- 
tion, the  individual  members  are  known  as  the  stockholders  and  the  organization  is  known 
as  a  corporation. 

The  assets,  of  a  person,  firm,  or  corporation,  are  the  accounts,  rights  and  properties 
owned,  such  as  lands,  buildings,  patents,  goods,  notes  and  accounts  receivable,  money, 
etc.  Resources  is  another  name  for  properties  and  rights  owned.  When  the  assets  exceed 
the  liabilities,  the  difference  is  the  net  assets. 

The  liabilities,  of  a  person,  firm,  or  corporation,  are  the  obligations  owed  by  such 
person  or  organization,  such  as  mortgages  on  the  land  and  buildings,  notes  and  accounts, 
payable.    When  the  liabilities  exceed  the  assets  the  difference  is  the  net  liabilities. 

Balance  Sheet  is  the  technical  name  given  to  the  statement  of  the  assets,  liabilities 
and  capital  of  a  business. 

The  proprietor's  investment  is  the  amount  of  the  assets  put  into  the  business.  The 
net  investment  is  the  amount  of  the  assets  put  into  the  business  less  the  liabilities. 

The  proprietor's  withdrawals  are  the  amounts  taken  out  of  the  business,  such  as 
money  and  goods  from  the  store  at  cost,  which  withdrawals  reduce  the  investment. 

The  proprietor's  net  capital  in  the  business,  at  any  closing  date,  is  his  net  investment 
plus  the  net  profit  or  minus  the  net  loss. 


PROPRIETOR'S  ACCOUNT 


13 


PROPRIETOR'S  ACCOUNT  PROBLEMS 

1.  January  1,  a  person  began  business  with  an  investment  of  $10,000.00  cash.  At  the  end  of  the  first 
month,  the  net  profit  was  S752.50.  \\  hat  was  the  amoimt  of  tlio  investments  and  profit  at  the  end  of  the 
month? 

2.  Feb.  1,  W.  H.  Wj^hes  began  business  with  assets  as  follows:  Money  in  bank  $10,000.00;  Accounts 
Receivable  SI, 750. 75.  His  liabilities  on  the  same  date  were  as  follows:  Accounts  Payable  $254.15. 
What  was  his  net  investment? 

3.  During  February,  W.  H.  Wylies'  net  profit  was  $2,146.50  and  his  withdrawals  amounted  to  $500.00. 
What  was  his  net  investment  Feb.  28?    What  was  his  net  capital  Feb.  28? 

4.  H.  N.  Nolan,  E.  J.  Doolin  and  E.  C.  McGuire  began  business  as  partners  March  1  under  the  firm 
name  of  Noian,  Doolin  &  McGuire.  Mr.  Nolan  invested  $10,000.00.  Mr.  Doolin  invested  $8,000.00 
but  had  debts  amounting  to  $1,250.00  which  were  assumed  by  the  firm.  Mr.  McGuire  invested  $7,500.00. 
During  the  month  Mr.  Doolin  increased  his  investment  $1,000.00  at  one  time  and  $250.00  at  another. 
Mr.  Nolan  withdrew  for  his  personal  use  during  the  month  a  total  of  $1,000.00  from  his  investment.  The 
otner  partners  made  no  withdrawals.  At  the  end  of  March  the  net  profit  was  found  to  be  $4,500.00  which 
was  divided  equally  and  credited  to  each  partner's  account.  What  was  the  net  capital  of  each  partner  at 
the  end  of  March? 

EXERCISE  V 

Trace  the  transactions  in  this  exercise  to  the  illustrative  account  with  H.  M.  Strong, 
Proprietor. 

Sep.     1.  H.  M.  Strong,  proprietor,  began  business  with  net  assets  amounting  to  $2300.00. 
15.  H.  M.  Strong  made  an  additional  investment  of  cash  amounting  to  $1,000.00. 
15.  H.  M.  Strong  withdrew  for  personal  use  cash  $25.00. 

15.  Paid  the  personal  electric  light  bill  rendered  H.  M.  Strong  at  his  residence,  $3.50. 
30.  The  net  profit  for  the  month  was  $467.60 


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The  credit  side  of  this  account  shows  H.  M.  Strong's  original  net  investment  of 
$2,300.00,  his  additional  investment  of  $1,000.00  and  the  net  profit  for  the  month.  The 
debit  side  shows  his  withdrawals,  which  consisted  of  cash  and  a  personal  bill  paid  by  the 
business.  The  latter  was  in  effect  additional  cash  withdrawn.  His  net  investment  Sept.  30 
in  the  business  as  shown  by  his  account  was  $3,271.50,  his  net  profit  $467.60,  and  his 
net  capital  after  crediting  the  net  profit  was  $3,739.10. 

Purpose.  To  contain  a  record  of  the  proprietor's  investments  and  of  his  withdrawals 
as  made,  and  the  net  profit  or  the  net  loss  at  the  end  of  a  business  period. 

Method.  Credit  the  proprietor's  account  with  his  investments  as  made  and  with  the 
net  profit  at  the  end  of  the  business  period  showing  net  profit.    Debit  or  charge  the  pro- 


14 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


prietor's  account  with  his  withdrawals  as  made  and  with  the  net  loss  at  the  end  of  the 
business  period  showing  net  loss. 

Result.  The  difference  between  the  two  sides  of  the  proprietor's  account,  previous 
to  the  end  of  the  business  period,  is  his  balance  or  net  investment;  after  the  net  profit 
or  the  net  loss  has  bipen  entered,  it  is  his  balance  or  net  capital. 

BALANCING  AND  RULING  PROPRIETORS'  ACCOUNTS 

The  proprietor's  account  is  balanced  the  same  as  an  account  receivable  or  payable 
as  explained  in  the  preceding  chapter. 

The  ruling  is  the  same  as  explained  under  accounts  receivable. 

The  account  of  H.  M.  Strong,  Proprietor,  is  here  shown  as  balanced  and  ruled. 


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QUESTIONS  ON  H.  M.  STRONG,  PROPRIETOR.  ACCOUNT 

1.  What  does  the  total  of  the  credit  side  show?    2.  What  does  the  total  of  the  debit  side  show?    3. 
What  effect  would  it  have  upon  the  account,  if  the  proprietor  should  withdraw  all  his  capital? 

EXERCISE  VI 

Write  up  an  account  with  T.  L.  Foster,  Proprietor,  from  the  transactions  in  this 
exercise  and  submit  it,  together  with  written  answers  to  the  questions  following  the  trans- 
actions, for  approval.    Balance  and  rule  the  account. 

Oct.  1.  T.  L.  Foster  commenced  business  with  assets  as  follows:  Money  in  bank,  $5,000.00;  amounts  due 
him  from  E.  J.  Whitney  $1,500.00,  W.  L.  Winter  $250.00.      His  habihties  were  an  account  due 
R.L.  Speed  $950.00. 
10.  An  endowment  life  insurance  policy  held  by  the  proprietor  matiured;  and  the  amount,  $2,000.00 
cash,  was  invested  in  the  business. 

30.  Paid  the  proprietor's  grocery  bill  by  check,  $40.00. 

31.  The  net  profit  for  the  month  was  $302.10. 


QUESTIONS  ON  T.  L.  FOSTER'S  ACCOUNT 
1.  What  was  the  amount  of  T.  L.  Foster's  original  investment?  2.  Did  he  make  an  additional  invest- 
ment? 3.  Did  you  credit  T.  L.  Foster  with  his  investment?  (a)  Why?  4.  Is  there  any  difference 
between  paying  the  proprietor's  personal  grocery  bill  of  $40.00  out  of  the  oflBce  cash  and  charging  the  amount 
to  him,  and  his  drawing  $40.00  in  cash  and  settling  the  bill  himself?  5.  If  the  proprietor  invests  $10,000.00 
on  the  first  of  the  month  and  withdraws  $7,000.00  on  the  tenth  of  the  same  month,  what  is  the  difference 
called?    6.  What  was  T.  L.  Foster's  net  capital  after  crediting  the  net  profit  of  $302.10? 


PROPRIETOR'S  ACCOUNT 


15 


PARTNERSHIP 

EXERCISE  VII 

Trace  the  transactions  in  this  exercise  to  the  illustrative  accounts  with  Charles  R. 
Blake  and  Henry  B.  Smith,  partners,  doing  business  under  the  firm  name  of  Blake  & 
Smith,  dividing  the  net  profits  and  the  net  losses  equally: 

Sep.  1.  Charles  R.  Blake  invested  the  following:  Cash  $3,600.00;  $1,000.00  due  him  from  W.  B.  Young 

Henry  B.  Smith  invested  cash  $4,500.00.     An  account  is  opened  at  the  First  National  Bank  and 

the  cash  is  deposited  to  the  credit  of  Blake  &  Smith. 
10.  Henry  B.  Smith  made  an  (additional)  investment  of  $2,000.00  cash. 
20.  Charles  R.  Blake  withdrew  $150.65  to  pay  his  personal  life  insurance  premium.    This  was  done 

by  a  firm  check  made  payable  to  Charles  R.Blake  and  by  him  endorsed  to  the  Life  Insurance  Co. 
25.  Henry  B.  Smith  withdrew  $2,200.00  to  pay  off  a  mortgage  on  his  residence.   This  withdrawal  was 

made  by  means  of  a  firm  check  to  Henry  B.  Smith  and  endorsed  by  him. 
30.  The  net  profits  for  the  month  were  $1,150.40,  and  were  divided  equally. 


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State  in  writing  the  original  investment  of  each  partner,  the  net  investment  of  each 
partner,  and  the  net  capital  of  each  partner  after  closing. 

Purpose.  To  contain  a  record  of  the  investments  and  of  the  withdrawals  of  each 
partner  as  made  and  of  the  agreed  share  of  the  net  profit  or  the  net  loss  at  the  end  of  the 
business  period. 

Method.  Credit  each  partner's  account  with  his  investments  as  made  and  with  his 
share  of  the  net  profit  at  the  end  of  a  business  period  showing  net  profit.  Charge  each 
partner's  account  with  his  withdrawals  as  made  and  with  his  share  of  the  net  loss  at  the 
end  of  a  business  period  showing  a  net  loss. 

Result.  The  difference  between  the  two  sides  of  a  partner's  account,  previous  to 
charging  his  loss  or  crediting  his  profit,  is  his  net  investment;  after  his  loss  has  been  charged 
or  his  profit  credited,  it  is  his  balance  or  net  capital. 

Two  accounts  are  often  kept  with  each  partner,  one  containing  the  investments  and 
the  other,  the  withdrawals.  This  method  of  handhng  proprietors'  and  partners'  accounts 
will  be  illustrated  later  in  this  textbook 


16  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

EXERCISE  VIII 

Open  and  write  up  the  partners'  accounts  covering  the  transactions  in  this  exercise 
and  submit  your  work,  together  with  written  answers  to  the  questions  at  the  close  of  the 
exercise,  for  approval.    Balance  and  rule  each  account. 

Jan.  1.  W.  B.  Warren,  CM.  Hunter  and  A.  B.  Blanchard  commence  business  under  a  partnership  agree- 
ment which  recites  that  the  investments  shall  be  $10,000.00  each;  that  each  partner  shall  give  all 
his  time  to  the  business ;  that  the  profits  or  the  losses  shall  be  divided  equally ;  and  that  the  firm  name 
shall  be  Warren,  Hunter  &  Co.  The  investments  were  made  and  the  amount  $30,000.00  deposited 
in  the  bank  to  the  credit  of  Warren,  Hunter  &  Co. 

Dec.  31.  There  were  no  additionl  investments  and  there  were  no  withdrawals  by  the  partners  during  the 
business  year.     The  net  loss  for  the  twelve  months  was  $1,592.40. 

QUESTIONS  ON  PARTNERS'  ACCOUNTS 

1.  What  was  the  amount  of  each  partner's  original  investment?  What  was  the  amount  of  each  part- 
ner's net  investment  before  balancing  the  account?  2.  What  was  the  amount  of  each  partner's  net  capital 
after  balancing  the  account? 

PROFIT  AND  LOSS 

The  Gross  Profit  is  the  difference  between  the  cost  of  goods  sold  and  the  net  sales. 
This  difference  is  sometimes  spoken  of  as  merchandise  profit  or  trading  profit. 

The  method  of  finding  gross  profit  is  fully  treated  in  a  following  chapter. 

General  Expenses  or  General  Expense  includes  such  items  as  rent,  salaries,  postage, 
telephone,  telegrams,  etc.  The  total  of  General  Expense  is  deducted  from  gross  profit 
and  the  result  is  a  net  profit,  if  the  gross  profit  exceeds  the  general  expenses.  But  if  the 
general  expenses  exceed  the  gross  profit  the  result  is  a  net  loss. 

Some  bookkeepers  use  the  term  Loss  &  Gain  instead  of  Profit  &  Loss  but  the  latter 
is  used  in  this  book. 

Submit  answers  in  writing  to  the  following: 

PROFIT  AND  LOSS  PROBLEMS 

1.  At  the  end  of  January  the  gross  profit  on  the  goods  sold  for  the  month  was  $590.40.  The  general 
expenses  were  $310.00.     What  was  the  net  profit  or  the  net  loss? 

2.  The  gross  merchandise  earnings  for  March  were  $800.00;  the  general  expenses  of  running  the  busi- 
ness were  $300.00.    What  was  the  net  profit  or  the  net  loss? 

3.  The  goods  sold  during  the  year  ended  Dec.  31  showed  gross  profits  of  $45,490.50;  the  general  ex- 
penses were  $47,510.35.     What  was  the  net  profit  or  the  net  loss? 

PROFIT  &  LOSS  ACCOUNT 

Profit  &  Loss  is  the  account  to  which  is  credited  gross  profits  and  to  which  is  charged 
all  the  losses. 

EXERCISE  IX 

Trace  the  items  making  up  the  following  illustrative  Profit  &  Loss  account  from  the 
statement  of  facts  in  this  exercise: 

Sep.  30.  The  merchandise  sales  made  by  H.  M.  Strong,  proprietor,  for  September  showed  gross  profits 
of  $700.35. 


ci:neral  expense 


17 


Sep.  30.    The  general  expenses  for  September  amounted  to  $232.75. 

30.  What  was  the  net  profit  or  net  loss  of  H.  M.  Strong  for  the  month? 


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It  is  not  necessary  to  write  the  word  "Account"  after  Profit  &  Loss  in  the  heading. 

Purpose.  To  contain  a  record  of  the  profits  and  the  losses  of  the  proprietor,  firm 
or  corporation. 

Method.     Debit  Profit  &  Loss  account  with  the  totals  of  all  losses. 

Credit  Profit  &  Loss  account  with  the  totals  of  all  profits. 

Result.  When  all  entries  have  been  made,  the  difference  between  the  two  sides  is 
the  net  profit  or  the  net  loss  for  the  fiscal  period. 

EXERCISE  X 

Operating  Accounts  is  the  name  frequently  applied  to  that  group  of  accounts  which 
show  the  profits  and  expenses  necessary  to  conducting  any  particular  business. 

Write  up  a  Profit  &  Loss  account  covering  the  following  facts,  foot  in  pencil  and 
determine  the  net  profit  or  the  net  loss,  and  submit  for  approval,  together  with  a  written 
answer  to  the  question  following  the  statement  of  facts. 

Dec.  31.  C.  M.  Warren's  books  showed  that  the  gross  profits  from  sales  were  $16,575.50.     The  general 
expenses  of  his  business  were  $9,205.10.    What  was  the  net  profit  or  the  net  loss? 


GENERAL  EXPENSE 

The  expenses  of  conducting  a  business  include:  rent,  light,  power,  heat,  salaries, 
telephone,  telegrams,  postage,  advertising,  printing,  stationery,  insurance,  carfare,  and 
numerous  other  items.  Frequently  in  a  small  business  these  items  are  charged  under  one 
heading.  General  Expense,  but  in  a  large  business  ea<"^  lame  used  above  may  include 
hundreds  of  separate  items.  In  such  cases  it  becomes  important  to  classify  properly  each 
item  of  expense.  Then  in  order  to  determine  the  expenses  for  the  year,  the  amounts  charged 
under  the  above  names  are  totaled.    This  total  is  frequently  called  General  Expenses. 

GENERAL  EXPENSE  PROBLEMS 

1.  The  expenses  of  Smith  &  Jones,  proprietors,  during  January  were:  Rent  $75.00;  salaries  $236.62; 
oflSce  stationery  $4.50;  postage  $12.70;  electric  light  bill  $3.42;  telephone  $12.00;  sundries  $1.25.  What 
were  the  total  expenses  for  the  month? 

2.  The  expenses  paid  by  the  above  firm  for  February  were:  Rent  $75.00;  salaries  $236.62;  advertising 
$60.00;  postage  $4.50;  stationery  $2.90;  telephone  $13.40;  sundries  $2.75.  They  received  $12.00  as  an 
allowance  on  their  advertising.    What  were  the  actual  expenses  for  February? 

3.  During  March  the  same  firm  actually  paid  for  running  expenses;  Rent  $75.00:  telephone  $12.25; 
postage  $4.90;  telegrams  $2.50;  interest  for  the  month  $30.00;  salaries  $236.62,  They  received  $.75  from 
an  employee  for  a  long  distance  telephone  call.    W^hat  were  the  expenses  for  the  month? 

4.  The  same  firm's  expenses  for  April  paid  in  cash  were:  Rent  $75.00;  salaries  $236.62;  telephone 
$13.50;  postage  $5.25;  stationery  $2.50;  printing  $4.00;  sundries  $3.00.  They  sub-let  a  small  display  space 
for  $10.00.     What  was  the  general  expense  for  April? 


18 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 
GENERAL  EXPENSE  ACCOUNT 


General  Expense  is  an  account  kept  to  show  the  expenses  of  running  a  business  during 
a  fiscal  period. 

EXERCISE  XI 

Trace  the  transactions  from  this  exercise  to  the  illustrative  account,  noting  particu- 
larly the  explanations: 

Sep.  1.  H.  M.  Strong,  proprietor  of  the  business,  gave  check  for  September  rent  $50  00. 

2.  Paid  cash  for  postage  $13.00. 

3.  Bought  office  stationery  at  City  Book  Store  on  account,  $10.50. 

4.  Paid  telephone  bill  by  check,  $12  50. 

5.  Paid  electric  light  bill  in  cash,  $3.25. 

6.  Paid  office  salaries  in  cash,  $59.75. 

8.  Paid  cash  for  telegram,  $.50. 

9.  Sold  postage  for  cash,  $2.50. 

10.  Secured  a  rebate  of  75c  in  cash  from  the  Electric  Light  Co. 

11.  Paid  cash  for  telegram,  50c. 

12.  Paid  office  salaries  in  cash,  $60.50. 
29.  Paid  office  salaries  in  cash,  $25.50. 


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The  general  expenses  for  September  as  shown  by  the  above  account  were  $232.75. 

Purpose.    To  show  the  expenses  of  conducting  the  business. 

Method.  Debit  Expense  or  General  Expense  with  all  expenses.  Credit  Expense  or 
General  Expense  with  any  deductions  from  the  amount  charged. 

Result.  The  difference  between  the  two  sides  of  this  account  is  the  net  amount  of 
the  general  expense. 


GENERAL  EXPENSE  19 

QUESTIONS  ON  GENERAL  EXPENSE  ACCOUNT 

1.  What  were  the  total  charges  to  this  account  for  the  ironth  of  September?  2.  What  were  the  total 
credits  to  this  account  for  the  month  of  September?  3.  What  was  the  actual  charge  for  electric  light  for 
the  month?  4.  What  did  postage  fof  the  month  actually  cost?  6.  Define  General  Expense.  6.  Which 
side  of  the  General  Expense  account  is  larger?  (a)  Why?  7.  Do  you  think  it  would  be  possible  for  the 
credit  side  of  the  General  Expense  account  to  be  larger  than  the  debit  side? 


EXERCISE  XII 

Open  an  account  with  General  Expense  and  write  up  the  following  transactions. 
Submit  your  work  for  approval. 

Oct.  1.  The  proprietor,  M.  M.  Huntington,  gave  check  for  office  rent  for  October,  $75.00. 

2.  Paid  cash  for  telegram,  75c. 

3.  Paid  cash  for  sundry  expenses,  $3.95. 

4.  Gave  check  for  telephone  bill,  $6.75. 

5.  Paid  cash  for  postage,  $5.00. 

6.  Paid  clerks'  salaries  in  cash,  $48.50, 

8.  John  Adams  has  paid  $10.00  cash  for  desk  room  sub-let  to  him. 

9.  Gave  check  for  advertising,  $8.50. 

10.  Paid  interest  on  note,  $25.00,  by  check. 

11.  Gave  check  for  electric  light  bill,  $3.25. 

12.  Paid  clerks'  salaries  in  cash,  $51.20. 
30.  Paid  clerks'  salaries  in  cash,  $30.00. 


EXERCISE  xin 

Open  and  write  up  an  account  with  General  Expense,  covering  the  following  trans- 
actions, and  submit  your  work  for  approval: 

Nov.  1.  Same  proprietor  as  in  last  exercise  pays  rent  for  November  by  check,  $75.00. 

5.  Gave  check  for  telephone  bill,  $7.50. 

8.  John  Adams  paid  $10.00  for  desk  room  sub-let  to  him. 
10.  Bought  stationery  for  cash,  $3.15. 
13.  Paid  cash  for  telegram,  $.40. 
20.  Gave  check  for  electric  light  bill,  $2.75. 
26.  Paid  cash  for  typewriter  repairs,  $1.25. 
30.  Paid  clerks'  salaries  in  cash,  $150.75. 


ABBREVIATIONS  AND  CONTRACTIONS                                • 

Advertising Adv.  Postage Post 

Capital Cap.  Printing Ptg, 

Corporation Corp.  Profits Prof. 

Expense Exp.  Profit  &  Loss  Account P&L% 

Express Ex.  Proprietor Prop. 

General  Expense Gen.  Exp,  Resources , ^ Res. 

Insurance Ins.  Salary Sal. 

Interest Int.  Stationery Staty. 

Liability Lia,  Telegrams Tels. 

Net  Investment , Net  Inv,  Telephone Tel. 

Purtner Part, 


20 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 
SIMPLE  BUSINESS  FORMS 


An  Order  is  a  request  to  ship,  or  otherwise  deUver,  goods  or  other  property ;  it  may 
be  either  written  or  verbal.  Written  orders  are  preferable  and  should  be  dated,  numbered 
and  signed.     For  example: 


FORM  OF  ORDER  FOR  MERCHANDISE 


Your  No. 


Williams  Brothers  Co, 

1242  E.  Jackson  St. 

To  James  Lauer  &  Co.  New  Orleans,  La.  Sept.  24,  \9 

Muskegon,  Mich. 


Our  No.  1218 


Please  deliver  the  following: 


725  bbl.  Greening  Apples  @  $3,40 
125  bbl.  Steel  Red  Apples  @  $3.00 


Williams  Brothers  Co. 


By 


A  Bill  or  Invoice  is  the  memorandum  made  out  by  the  merchant  selling  the  goods 
and  is  deHvered  to  the  buyer.  It  gives  date,  name  of  purchaser,  terms,  order  number 
and  date  received,  quantities,  items,  prices,  extensions  and  amount.     For  example: 


FORM  OF  BILL  OR  INVOICE 


INVOICE     NO      5^^ 
S.  O.    NO.    1 
CONTRACT     NO.      10 

SOLD  TO    Western  Grocery  House, 


THE  WAUKESHA  CANNING   CO 

GROWERS  AND  PACKEHSOF 

FANCY  CANNED  GOODS 

WAUKESHA.WIS. 

oATe  Maroh  25,  19 


v.A  Wis  .  Cent, 

CAR  INITIAL      Wa     C* 


45  E,  Randolph  St.,  Chicago. 
cAir  NO  44050    F.  o.  B.  Waukesha 


50  Cs.  Old  Abe  2#  Com  100  Doz.  77^ 

50  *  Pewaukee  Lake  2#  Tomatoes  100  Doz.      7Qi 


BEANOS: 

Menu 

Old  Abe 

Pewaukee 
Lake 


■  ^ARHklNG  WAUKCSHA  MlM(n«k 

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77.50 

78.50    $156.00 


SIMPLE  BUSINESS 


21 


When  goods  are  received  they  should  be  examined  to  see  that  they  are  as  ordered 
and  that  they  are  in  proper  condition.  The  bill  covering  the  goods  should  be  checked 
as  to  quantities,  items,  prices,  extensions  and  amount.  The  number  of  the  order,  the  date 
the  goods  were  received  and  notations  that  the  order  has  been  approved  and  entered  should 
appear  on  the  face  or  back  of  the  invoice. 

A  credit  Memorandum  is  the  opposite  of  a  bill.  It  is  also  made  out  by  the  seller  of  the 
goods  and  is  the  authorized  allowance  or  reduction  in  the  bill  as  rendered.    For  example : 


^  -^tyv-^.4-^/^^.rirr^^^y  2\/^-tc<lt/>y 


CREDIT    MEMORANDUM 


Y- 


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-/9    - 


Biloxi  Canning  Co. 


Packers  of 

Canned  Shell  Fish,  Preserved  Figs  and  Vegetables 

Hmpt  trediitd  ymr  tuamnt  as  follows: 


/p  ^Jy^  a-^^  ?  <^0  -/^y^Z.^^^..^^.^^?li4^<,^A^^^d^.d^'r'n^. 


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A  Physical  Inventory  is  obtained  by  counting  and  listing  the  goods  on  hand.  The 
items  then  should  be  priced,  at  never  more  than  cost,  which  includes  freight  and  cartage 
to  the  store  or  warehouse;  the  Hst  should  then  be  extended  and  footed. 

An  Inventory  is  a  detailed  list  showing  quantities  of  all  goods  on  hand,  unsold,  at  any 
definite  date,  together  with  cost  prices,  extensions  and  total. 

E.  W.  BROOKS 

Inventory  of  Merchandise  Sep.  1,  19 

100  bu.  Apples @  $1.10  $110.00 

1.50  bu.  Potatoes @  1.20  180.00 

50  bu.  Peaches @  3.00  150.00 

60  bu.  Onions ^  .95  57.00 


$497.00 


A  Perpetual,  Book  or  Going  Inventory  is  obtained  from  records  showing  the  balance 
of  each  kind  of  goods  on  hand  at  any  date.  It  should  be  verified  occasionally  by  com- 
parison with  a  physical  inventory. 


22 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


A  Statement  of  Account  is  made  out  by  the  seller  and  shows  the  date  and  amount  of 
each  charge  and  of  each  credit  to  the  customer  in  accordance  with  the  books  of  the  mer- 
chant. This  statement  is  usually  made  out  on  the  first  of  each  month  and,  when  received 
by  the  customer,  should  be  checked  to  determine  if  it  is  in  agreement  with  his  own  books. 
For  example: 

FORM  OF  STATEMENT 


BXATEMEMT 


M- 


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364  WABASH  AVE. 


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MERCHANDISE  ACCOUNTS— PURCHASES  BOOK, 
SALES  BOOK  AND  TRIAL  BALANCE 

Merchandise  is  goods  bought  for  the  purpose  of  being  sold.  One  account  may  be 
kept  in  the  ledger  to  cover  all  merchandise  transactions,  as  General  Merchandise  account ; 
but  it  is  more  satisfactory  as  a  business  record  to  keep  separate  accounts  for  the  pur- 
chases, the  sales,  and  the  inventories. 

The  merchandise  accounts  should  be  so  kept  as  to  show  conclusively  these  six  things : 
The  Gross  Purchases  and  the  Net  Purchases,  the  Gross  Sales  and  the  Net  Sales,  the  Cost 
of  the  Goods  Sold  and  the  gross  Merchandise  Profit  or  gross  Merchandise  Loss. 


MERCHANDISE  ACCOUNTS 


23 


Merchandise  Purchases  or  simply  Purchases  is  the  ledger  account  on  the  debit  of 
which  is  entered  the  cost  of  the  goods  as  shown  by  the  invoices.  Freight  and  Cartage-in 
is  the  name  given  to  transportation  charges  on  purchases.  These  charges  include  the 
cost  of  bringing  the  goods  to  the  store  or  warehouse,  and  since  they  increase  the  cost  of 
the  goods  they  should  be  debited  to  Merchandise  Purchases  Account. 

Returns  and  Allowances  on  Purchases  is  the  name  given  to  purchase  items  returned, 
allowances  made  because  of  defective  goods  and  for  errors  in  billing.  These  items  reduce 
the  net  amount  of  the  purchases  and  are  credited  to  Merchandise  Purchases  account. 

The  difference  between  the  two  sides  of  Merchandise  Purchases  account  is  the  net 
purchases. 

MERCHANDISE  PURCHASES  PROBLEMS 

1.  The  goods  purchased  by  the  Hinton  Retail  Hardware  Company  for  the  year  amounted  to  $127,340.50 
the  freight  paid  on  same  was  $846.95;  the  cartage  from  raih-oad  freight  houses  to  the  store  was  $2,452.10. 
What  was  the  total  cost  of  the  merchandise  purchases,  delivered  at  the  store? 

2.  The  City  Grocery  Co.  purchased  goods  amounting  to  $75,640.75.  They  paid  for  freight  and  cart- 
age, $1,275.60.  The  merchandise  returned  by  them  amounted  to  $751.30  and  allowances  to  them  were 
$645.25.     What  were  the  gross  purchases?     What  were  the  net  purchases? 

MERCHANDISE  PURCHASES  ACCOUNT 

EXERCISE  XIV 

Trace  the  transactions  affecting  the  merchandise  purchases  from  the  following  exercise 
to  the  illustrative  Merchandise  Purchases  account. 

The  purchases  of  the  National  Jobbing  Conlpany  for  the  three  months  ended  March  31, 19 —  were  as 
follows:  January,  $19,510.65;  February,  $19,675.15;  March,  $19,750.25.  The  freight  and  cartage-in  (addi- 
tional cost)  by  months  was:  January,  $410.50;  February,  $425.75;  March,  $450.15.  The  goods  returned  by 
the  National  Jobbing  Company  during  the  three  months  follow :  January,  $90.15;  February,  $10.75;  March, 
$65.40.  The  allowances  for  errors  in  billing,  defects  in  goods,  etc.,  follow:  January,  $437.50;  February, 
$442.95;  March,  $5i8.45. 


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Purpose.  To  show  the  total  cost  of  goods,  including  the  freight  and  cartage-in  and  the 
returns  and  allowances  on  account  of  purchases. 

Method.  Debit  this  account  with  the  invoice  cost  of  goods  and  the  freight  and 
cartage-in. 


24 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


Credit  it  with  the  returns  and  the  allowances  on  account  of  purchases. 
Result.    The  difference  between  the  two  sides  of  this  account  is  the  net  purchases  of 
merchandise. 

BALANCING  AND  RULING  THE  MERCHANDISE  PURCHASES   ACCOUNT 

At  the  end  of  a  business  period  the  Merchandise  Purchases  account  should  be  balanced 
and  ruled  as  shown  in  the  following  illustration: 


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QUESTIONS  ON  MERCHANDISE  PURCHASES  ACCOUNT 

1.  What  does  the  total  of  the  debit  side  of  thia  account  show?  2.  How  much  was  paid  for  freight  and 
cartage  on  the  goods  purchased  during  the  three  months  shown  by  this  account?  3..  If  the  total  cost  of 
freight  and  cartage  is  taken  out  of  the  debit  side,  what  would  the  remainder  of  the  debit  items  show?  4. 
What  was  the  total  of  the  goods  returned  to  our  creditors  for  the  three  months?  5.  What  was  the  total  of 
allowances  made  to  us  for  the  three  months?  6.  What  does  the  balance  of  the  account  show?  7.  Should 
the  credit  side  of  this  account  be  larger  than  the  debit  side?  Why?  8.  Define  freight  and  cartage-in. 
9.  What  are  defective  goods?     10.  What  are  returned  goods?     11.  What  are  errors  in  billing? 

EXERCISE  XV 

Write  up  a  Merchandise  Purchases  account,  omitting  figures  in  the  folio  column, 
from  the  information  given  in  this  exercise,  and  submit  your  work  for  approval.  Balance 
and  rule  the  account. 

Feb.  28.  Purchases  $21,384.67,  frt.  &  ctg.-in  $83.76,  returns  $102.64,  allowances  $188.37. 
Mar.  31.  Purchases  $16,984.72,  frt.  &  ctg.-in  $71.69,  returns  $75.11,  allowances  $108.47. 
Apr.  30.  Purchases  $17,842.35,  frt.  &  ctg.-in  $74.46,  returns  $84.60,  allowances  $94.78. 


MERCHANDISE  INVENTORY  PROBLEMS 

1.  M.  M.  Hunter,  proprietor,  purchased  1  dozen  pocket  knives  at  $12.00  per  doz.  and  sold  9  at  $1.50 
each.  The  inventory  at  the  closing  period  showed  3  knives  at  cost.  What  was  the  cost  of  the  knives  sold? 
What  was  the  merchandise  profit  or  the  merchandise  loss?  What  w^as  the  per  cent  of  profit  or  the  per  cent 
of  loss  on  the  cost  price  of  the  goods?    On  the  selling  price  of  the  goods? 


MERCHANDISE  ACCOUNTS 


25 


2.  Elmer  Whipple,  a  trader,  bought  150  hogs  at  an  average  cost  of  $21.50  each,  200  sheep  at  an  average 
cost  of  $13.85  each,  80  cattle  at  an  average  cost  of  $114.75  each.  He  sold  110  hogs,  150  sheep  and  60  cattle. 
Prepare  an  inventory  sheet  for  Mr.  Whipple. 

'3.  In  the  above  problem,  Mr.  Whipple  sold  his  hogs  at  an  average  price  of  $26.80  each,  the  sheep  at 
an  average  price  of  $16.40  each,  and  the  cattle  at  an  average  price  of  $126.60  each.  What  was  the  total 
amount  of  sales?     What  was  the  gross  profit? 

4.  Find  the  cost  of  the  property  sold  in  Problem  3. 

Prove  the  result  in  Problem  4  in  any  manner  you  can. 


MERCHANDISE  INVENTORY  ACCOUNT 

Merchandise  Inventory  is  the  ledger  account  which  is  debited  with  the  value  of  all 
unsold  goods  at  the  time  of  beginning  a  business  or  at  the  end  of  a  business  period.  This 
account  should  agree  in  amount  with  a  written  list  of  the  unsold  goods  generally  made  up 
by  the  proprietor  of  the  business  or  some  one  familiar  with  the  goods  and  their  cost  prices. 

EXERCISE  XVI 

Trace  the  amount  in  the  following  exercise  to  the  illustrative  Merchandise  Inventory 
account. 

March  31,  19 — .    The  merchandise  on  hand  at  the  end  of  the  fiscal  period  of  the  National  Jobbing 
Company  amounted  to  $15,997.73. 


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The  inventory  sheets  showing  items,  prices,  etc.,  are  not  supphed  for  the  above  illus- 
tration as  they  would  require  too  much  space. 

Purpose.  To  show  during  the  year,  or  other  fiscal  period,  the  value  of  goods  on  hand 
at  the  beginning  of  that  period. 

Method.  Charge  this  account  with  the  value  of  merchandise  when  beginning  business, 
or  with  the  value  of  the  unsold  goods  at  the  beginning  of  a  fiscal  period.  Credit  this  account 
at  the  end  of  a  fiscal  period  with  the  amount  of  the  merchandise  inventory  that  was  charged 
to  it  at  the  beginning  of  the  period. 

Result.  This  account  should  show,  during  a  fiscal  period,  the  goods  on  hand  at  the 
beginning  of  that  period. 


BALANCING  AND  RULING  MERCHANDISE  INVENTORY  ACCOUNT 

The  Merchandise  Inventory  account  when  kept  as  outlined  here  would  not  need  to 
be  balanced,  as  the  last  item  appearing  on  the  debit  side  of  this  account  would  be  the 
amount  of  the  account  to  show  during  the  following  fiscal  period. 

Other  items  appearing  on  the  debit  and  credit  side  of  this  account  would  balance, 
and  they  would  be  ruled  the  same  as  balancing  items  in  a  personal  account. 


26  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

COST  OF  GOODS  SOLD 

Another  important  step  in  bookkeeping  is  that  of  determining  the  "cost  of  goods 
sold"  or  "cost  of  sales."  This  is  readily  obtained,  when  the  accounts  show  the  net  pur- 
chases and  the  unsold  goods  at  the  end  of  a  business  period,  by  deducting  the  merchandise 
inventory  from  the  net  merchandise  purchases. 

The  Merchandise  Purchases  account  of  the  National  Jobbing  Co.  shows  the  net 
purchases  for  the  three  months  ending  March  31,  to  be  $58,657.25.  The  Merchandise 
Inventory  account  of  the  same  company  shows  goods  on  hand,  March  31  at  cost  to  the 
value  of  $15,997.73.  To  show  the  cost  of  goods  sold,  the  amount  of  the  inventory  is  de- 
ducted from  the  net  purchases  as  follows : 

Net  Purchases  $58,657.25 

Inventory  Mar.  31  15,997.73 

Cost  of  Goods  Sold  $42,659.52 

PROBLEMS  IN  COST  OF  GOODS  SOLD 

1.  The  net  purchases  of  a  business  for  one  year  were  $10,500.00  and  the  inventory  at  the  end  of  the 
year  amounted  to  $7,200.00.    What  was  the  cost  of  the  goods  sold? 

2.  H.  G.  Schell  bought  a  business  and  started  with  goods  valued  at  $1,439.64.  His  net  purchases 
during  the  year  amounted  to  $11,397.86.    What  were  his  total  net  purchases  of  goods  at  the  end  of  the  year? 

3.  At  the  end  of  the  year  Mr.  Schell  had  not  sold  all  his  goods.  By  making  an  inventory  he  found  that 
his  unsold  goods  cost  him  $1,374.94.    What  was  the  cost  of  the  goods  he  had  sold? 

4.  The  inventory  (or  goods  on  hand)  at  the  beginning  of  the  year  amounted  to  $15,640.20.  The  net 
purchases  for  the  year  were  $40,160.35.  The  inventory  at  the  close  of  the  year  was  $8,141.10.  What 
was  the  cost  of  the  goods  sold  that  year? 

MERCHANDISE  SALES 

Merchandise  Sales  is  the  ledger  account  on  the  credit  side  of  which  is  entered  the 
gross  amount  of  the  sales  for  the  day,  week  or  month.  Returns  and  Allowances  on  Sales  is 
the  term  used  to  designate  sales  items  returned  by  customers  and  allowances  made  for 
defective  goods.  Freight  and  Cartage-Out  is  transportation  charges  incurred  in  delivering 
the  goods  sold.  It  includes  freight  and  express  paid  by  the  merchant  and  the  cost  of 
delivering  the  goods  to  the  carrier. 

These  items  reduce  the  amount  of  the  sales  and  are,  therefore,  charged  to  Merchandise 
Sales  account.  The  difference  between  the  two  sides  of  Merchandise  Sales  account  is  the 
Net  Sales. 

MERCHANDISE  SALES  PROBLEMS 

1.  The  gross  sales  of  a  manufacturing  company  for  the  year  amounted  to  $215,104.90.  The  returns 
and  allowances  amounted  to  $7,410.65.     What  were  the  net  sales? 

2.  The  Union  Hardware  Company's  gross  sales  for  the  year  amounted  to  $275,425.65.  The  returns 
and  allowances  were:  Returned  goods  $3,950.20;  allowances  for  defective  goods  $475.10;  freight  and  cartage- 
out  $3,871.40.    What  were  the  net  sales  for  the  year? 

EXERCISE  XVII 

Trace  the  transactions  affecting  the  merchandise  sales  from  the  following  exercise  to 
the  illustrative  Merchandise  Sales  account. 


MERCHANDISE  ACCOUNTS 


27 


The  sales  of  the  National  Jobbing  Company  for  the  three  months  ended  March  31, 19 — were  as  follows; 
January,  $20,150.60;  February,  $19,410.25;  March,  $21,594.10.  The  record  of  returned  goods  by  months 
follows:  January,  $375.10;  February,  $490.15;  March,  $700.45.  The  freight  and  cartage-out  (delivery 
expense)  by  months  follows:  January,  $260.40;  February,  $201.50;  March,  $275.00.  The  allowances  made 
to  customers  were  as  follows:  January,  $190.15;  February,  $415.30;  March,  $435.20. 


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Purpose.  To  show  the  gross  sales,  the  returns,  allowances  and  other  deductions, 
and  the  net  sales  of  goods. 

Method.    Credit  Merchandise  Sales  account  with  all  sales. 

Debit  Merchandise  Sales  account  with  the  delivery  expenses,  with  goods  returned, 
and  with  allowances. 

Result.  The  amount  of  the  credit  side  of  the  account  is  the  gross  sales;  the  amount 
of  the  debit  side  is  the  returns,  allowances  and  other  deductions.  The  difference  between 
the  two  sides  is  the  net  sales.  The  account  should  be  balanced,  ruled,  and  the  balance 
brought  down,  at  the  end  of  the  fiscal  period. 


BALANCING  AND  RULING  THE  MERCHANDISE  SALES  ACCOUNT 

At  the  end  of  a  business  period  the  Merchandise  Sales  account  should  be  balanced 
and  ruled  to  show  the  net  sales. 

The  Merchandise  Sales  account  of  the  National  Jobbing  Co.  when  balanced  and 
ruled  is  shown  below : 


QUESTIONS  ON  THE  MERCHANDISE  SALES  ACCOUNT 

1.  What  does  the  total  of  the  credit  side  show?  2.  What  was  the  total  amount  of  the  goods  returned 
during  the  period?  3.  What  was  the  total  amount  of  allowances  made  during  the  period?  4.  What  waa 
the  total  amount  to  be  deducted  from  the  gross  sales?  5.  What  would  the  balance  be  called?  6.  Should 
the  debit  side  of  this  account  be  larger  than  the  credit  side?  Why?  7.  What  is  meant  by  freight  and 
cartage-out? 


28 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


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EXERCISE  XVIII 

Write  up  a  Merchandise  Sales  account,  omitting  figures  in  the  folio  column,  from  the 
information  given  below  and  submit  your  work  for  approval.    Balance  and  rule  the  account. 


Feb.  28.  Sales  $18,437.12,  frt.  &  ctg.-out  $71.50,  returns  $106.37,  allowances  $41.12. 
Mar.  31.  Sales  $20,294.86,  frt.  &  ctg.-out  $76.85,  returns  $94.16,  allowances  $44.78. 
Apr.  30.  Sales  $21,162.34,  frt.  &  ctg.-out  $78.25,  returns  $98.32,  allowances  $43,80. 


I 


PROBLEMS  IN  GROSS  PROFIT 

The  gross  profit  is  obtained  by  deducting  the  cost  pf  goods  sold  from  the  net  mer- 
chandise sales. 

1.  The  City  Lumber  Co.,  the  first  month  they  were  in  business,  sold  goods  amounting  to  $12,386.92 
net,  and  purchased  goods  amounting  to  $21,637.18  net.  Their  inventory  showed  goods  on  hand  that  cost 
$9,887.74.     Find  their  gross  profit. 

2.  The  second  month  the  City  Lumber  Co.  purchased  goods  amounting  to  $30,216.90  net  and  made 
net  sales  amounting  to  $19,894.18.  An  inventory  showed  goods  on  hand  that  cost  $21,869.73.  What 
was  their  gross  profit  or  gross  loss? 

3.  Refer  to  page  23,  the  purchases  of  the  National  Jobbing  Company,  to  page  25,  the  inventory 
of  the  same  company,  and  to  page  27,  the  sales  of  the  same  company.       Determine  their  gross  profit  or  loss. 


BOOKS  OF  ORIGIXAL  ENTRY  2d 

BOOKS  OF  ORIGINAL  ENTRY 

All  business  transactions  should  be  recorded.  In  the  matter  of  leasing  a  store,  the 
record  is  sufficient  when  a  copy  of  the  lease  is  on  file.  In  many  other  mattere  a  memoran- 
dum made  at  the  time  of  the  business  agreement  is  all  the  record  required ;  but  when  the 
transaction  involves  the  purchase  or  sale  of  goods,  a  record  should  be  made  in  some  book 
of  original  entry. 

Books  of  Original  Entry  are  those  in  which  the  transactions  are  first  recorded.  They 
are:  Purchases  Book,  Sales  Book,  Cash  Book,  Journal,  and  elaborated  forms  of  these 
books  or  sections  of  them  under  special  names. 

Books  of  Final  Entry  are  the  Ledgers  containing  the  accounts. 

Auxiliary  Books  contain  supplemental  information,  such  as  statistics,  expiration  of 
insm-ance,  deliveries,  order  records,  etc. 

A  Set  of  Books  is  a  term  used  to  cover  all  the  books  used  to  record  the  transactions 
of  a  business  house. 

PURCHASES  BOOK 

This  is  a  book  of  original  entry  in  which  is  entered  a  record  of  the  invoices  received 
from  persons,  firms  or  corporations  from  which  goods  are  purchased  on  account,  or  on 
terms.  It  should  show,  at  least,  the  date  of  the  invoice,  the  name  of  the  person,  firm  or 
corporation  from  which  the  goods  were  purchased,  the  terms  of  purchase  and  the  amount 
of  the  invoice. 

Posting  is  the  process  of  transcribing  in  the  ledger,  to  the  proper  account,  the  infor- 
mation contained  in  an  entry  in  a  book  of  original  entry. 

POSTING  THE  PURCHASES  BOOK 

The  total  of  this  book  is  posted  to  the  debit  side  of  the  Merchandise  Purchases  account 
in  the  ledger. 

The  amount  of  each  invoice  is  posted  to  the  credit  of  some  personal  account  in  the 
ledger.  Thus,  if  three  invoices  are  received  and  entered  in  the  Purchases  Book  from  one 
creditor,  there  should  be  three  amounts  posted  to  the  credit  side  of  this  creditor's  account 
in  the  ledger. 

It  will  be  readily  seen  that  the  amount  posted  to  the  debit  side  of  Merchandise  Pur- 
chases account  must  equal  the  amounts  posted  (individually)  to  the  credit  side  of  the 
personal  accounts.    This  results  in  what  is  known  as  double  entry  bookkeeping. 

Double  Entry  Bookkeeping  is  the  result  of  posting  to  the  ledger  both  the  debit  amount 
or  amounts  and  the  credit  amount  or  amounts  contained  in  each  original  entry. 

When  all  the  debit  amounts  contained  in  the  original  entries  are  posted  to  the  ledger 
as  debit  amounts  and  all  the  credit  amounts  contained  in  the  original  entries  are  posted 
to  the  ledger  as  credit  amounts,  it  is  clear  that  all  the  debit  amounts  (in  the  ledger)  must 
equal  all  the  credit  amounts  (in  the  ledger) .  The  correctness  of  posting  is  tested  by  a  trial 
balance. 

A  Trial  Balance  is  a  list  of  all  the  accounts  in  the  ledger,  that  show  a  balance,  together 
with  the  amounts  of  the  balances.  The  total  of  the  debit  balances  should  equal  the  total 
of  the  credit  balances.  This  is  called  a  trial  balance  of  differences.  Instead  of  using  the 
balance  of  each  account,  the  total  of  the  debits  of  each  account  and  the  total  of  the  credits 


30 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


of  each  account  may  be  used,  and  this  is  called  a  trial  balance  of  amounts.    The  first 
method  is  preferable  and  is  the  one  most  commonly  used  in  business. 

The  phrase,  terms  of  purchase  or  terms  of  sale,  refers  to  the  agreement  made  between 
the  parties  to  the  transaction  as  to  how  or  when  payment  is  to  be  made.  "Terms  30  days" 
means  that  the  buyer  of  the  goods  does  not  need  to  pay  for  the  goods  until  30  days  from 
the  date  of  the  invoice  covering  the  goods  sold.  Of  course,  he  may  pay  before  30  days  if 
he  desires  to  do  so.  ^ 

EXERCISE  XIX 

Trace  the  transactions  in  the  following  exercise  to  the  illustrative  Purchases  Book 
and  then  trace  the  postings  from  the  Purchases  Book  to  the  accounts  in  the  ledger  and  to 
the  trial  balance.  In  posting,  the  page  of  the  Purchases  Book  is  entered  in  the  folio  column 
in  the  ledger  account  and  the  page  of  the  ledger  account  is  entered  in  the  folio  column 
in  the  Purchases  Book. 

Jan.  7.  The  proprietor,  William  H.  Quarles,  received  a  shipment  of  flour  from  Pillsbury  Mills,  Minneapolis, 

Minn.    The  invoice  was  dated  Jan.  2,  19 — ,  amount  $1,122.50,  terms  30  da. 
12.  Bought  of  the  Lincoln  Mills,  Chicago,  flour  invoiced  at  $275.75.  Date  of  invoice  Jan.  11, 19 — , 

terms  30  da. 
15.  Received  of  Pillsbury  Mills  a  shipment  of  flour  ordered  Jan.  4, 19 — .  Date  of  invoice  Jan.  12, 19 — , 

amount  $971.40,  terms  30  da. 
20.  Bought  of  the  Lincoln  Mills  flour  invoiced  at  $840.25.  Date  of  invoice  Jan.  18, 19 — ,  terms  30  da. 
25.  Received  of  Pillsbury  Mills  a  shipment  of  flour  invoiced  at  $1,521.50.     Date  of  invoice  Jan.  20, 

19—,  terms  30  da. 
28.  Received  of  the  Lincoln  Mills  flour  invoiced  at  $495.10.  Date  of  invoice  Jan.  27, 19 — ,  terms  30  da. 


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BOOKS  OF  ORIGINAL  ENTRY 


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Purpose.  To  contain  an  original  permanent  record  of  the  invoices  for  goods  bought 
on  account. 

Method.  As  the  invoices  are  approved  they  are  entered  in  the  purchases  book  and 
the  footings  of  that  book  are  posted  monthly  to  the  debit  of  Merchandise  Piu-chases  ac- 
count in  the  ledger.  The  amounts  of  the  several  invoices  should  be  posted  daily  to  the 
credit  of  the  persons  from  whom  the  goods  were  purchased  on  account,  conforming  to 
the  method  illustrated  under  accounts  payable. 

Closing  and  Ruling.  In  the  preceding  illustration  the  purchases  book  is  shown  as 
ruled  and  closed. 

Closing  the  purchases  book  means  that  no  more  entries  will  be  made  in  it  for  that 
particular  period  of  time,  whether  one  month  or  otherwise.  Therefore  it  is  footed,  ruled, 
and  the  totals  posted,  thus  being  formally  closed. 

In  a  large  business  the  purchases  book  is  generally  held  open  for  two  or  three  days 
following  the  end  of  a  month.  This  is  done  to  allow  some  time  for  the  invoices  for  goods, 
purchased  the  last  two  or  three  days  of  the  preceding  month,  to  come  through  the  mail 
and  be  verified. 

The  purchases  book  may  be  closed  and  ruled  at  any  time,  but  this  is  usually  done  at 
the  end  of  a  month. 


32  LYONS'  B00KKEEPIN<5  AND  ACCOUNTING 

QUESTIONS  ON  THE  PURCHASES  BOOK 

1.  Write  a  short  description  of  a  purchases  book.  2,  To  what  account  are  the  footings  of  this  book 
posted?  (a)  Which  side?  3.  Is  the  account  with  Pillsbury  Mills  a  personal  account?  (a)  Is  it  a 
creditor's  account  on  the  books  of  William  H.  Quarles?  4.  What  is  posting?  6.  Define  trial  balance. 
6.  What  is  double  entry  bookkeeping? 

EXERCISE  XX 

Write  up  a  Merchandise  purchases  book  from  the  following  transactions.  Post, 
take  off  a  trial  balance  as  at  Feb.  28,  and  submit  your  work  for  approval. 

Feb.     6.  The  Homer  Hardware  Co.,  received  of  the  Simmons  Hardware  Co.,  St.  Louis,  Mo.,  goods  ordered 

Jan.  28  19 — .    The  invoice  was  dated  Feb.  2,  19 — ,  amount  $391.55.    Terms  30  days. 
10.  Received  of  Yale  &  Towne  Manufacturing  Co.,  New  Haven,  Conn.,  goods  invoiced  at  $475.25. 

Date  of  invoice  Feb.  6.    Terms  60  days. 
12.  Received  of  Pratt  Manufacturing  Co.,  Providence,  R.  I.,  goods  invoiced  at  $129.85.     Date  of 

invoice  Feb.  8.    Terms  30  days. 
15.  Received  of  Simmons  Hardware  Co.  goods  invoiced  at  $195.65.     Date  of  invoice  Feb.  12,  19 — . 

Terms  30  days. 

23.  Received  of  Wilson  Hardware  Co.,  South  Bend,  Ind.,  an  invoice  of  goods  amoimting-to  $475.62. 
Date  of  invoice  Feb.  22,  19 — .    Terms  30  days. 

24.  Received  of  Yale  &  Towne  Manufacturing  Co.  goods  invoiced  at  $157.65,  dated  Feb.  21, 19 — . 
Terms  30  days. 

27.  Received  of  Wilson  Hardware  Co.,  South  Bend,  Ind.,  goods  invoiced  at  $450.25.     Date  of  invoice 
Feb.  25.    Terms  30  days. 

SALES  BOOK 

This  is  the  book  of  original  entry  in  which  is  made  a  record  of  the  goods  sold  on  account. 
This  record  should  contain  the  date  of  the  sale,  the  name  of  the  purchaser,  the  quantity, 
weight  or  number  of  articles  sold,  the  price  of  the  selling  unit,  the  amount  of  the  sale, 
and  the  terms  of  the  sale. 

It  is  generally  the  custom  to  make  the  bill,  number  it,  and  then  record  it  in  the  sales 
book,  after  which  it  is  sent  to  the  purchaser.  Sometimes  a  carbon  copy  of  the  bill  is  made 
at  the  time  the  bill  itself  is  made;  then  the  carbon  copy  is  filed  in  a  binder  as  a  leaf  in  the 
sales  book. 

POSTING  THE  SALES  BOOK 

The  total  of  the  sales  book  is  posted  to  the  credit  side  of  the  Merchandise  Sales  account 
in  the  ledger.  The  amount  of  each  sale  is  posted  to  the  debit  side  of  the  account,  in  the 
ledger,  of  the  person,  firm  or  corporation  to  which  the  goods  were  sold. 

The  amount  of  each  sale  shoald  be  posted  (from  day  to  day)  as  the  sale  is  made,  while 
the  total  of  the  sales  book  should  be  posted  at  the  end  of  the  month.  The  sales  book 
should  be  footed  in  pencil  daily  so  that  there  will  be  no  delay  in  ascertaining  the  total  at 
the  end  of  the  month. 

EXERCISE  XXI 

Trace  the  transactions  in  the  following  exercise  to  the  illustrative  Sales  Book  and  then 
trace  the  postings  from  the  Sales  Book  to  the  accounts  in  the  ledger  and  to  the  trial  balance. 
In  posting,  the  page  of  the  Sales  Book  is  entered  in  the  folio  column  in  the  ledger  account, 
and  the  page  of  the  ledger  account  is  entered  in  the  folio  column  in  the  Sales  Book 


BOOKS  OF  ORIGINAL  ENTRY 


33 


Jan.  10.  William  Britten  &  Co.,  flour  dealers,  sold  a  bill  of  goods  to  W.  B.  Allen,  100  S.  Wabash  Ave., 
on  account.     25  bbl.  White  Cap  ®  9.02.     Terms  30  days. 
15.  Sold  to  Boston  Bakery  Co.,  300  W.  Madison  St.,  Chicago,  17  bbl.  St«r  Pastry  @  9.25.     Terms 
30  days. 

20.  Sold  to  Stevens  Bros.  Corporation.  17  N.  State  St.,  30  bbl.  Star  Pastry  @  9.25,  5  bbl.  Columbu8 
@  8.85.    Terms  30  days. 

21.  Sold  to  the  Ward  Bakery  Co.,  55th  &  Wabash  Ave.,  terms  30  days,  75  bbl.  Golden  Fleece  @  10.00. 
27.  Sold  to  the  Boston  Bakery  Co.,  20  bbl..  Star  Pastry  @  9.25,  20  bbl.  White  Cap  @  9.52.    Terms 

30  days. 
.  28.  Sold  to  Stevens  Bros.  Corporation,  15  bbl.  Golden  Fleece  @  10.00.  Terms  30  days. 


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BOOKS  OF  ORIGINAL  ENTRY  35 

Purpose.  To  provide  an  original  permanent  record  of  the  sales  of  merchandise  on 
account. 

Method.  As  the  bills  are  made  they  are  entered  in  the  sales  book,  and  the  footings 
of  that  book  are  posted  monthly  or  more  frequently  to  the  credit  of  Merchandise  Sales 
account  in  the  ledger.  The  sales  are  posted  daily  to  the  debit  of  the  account  with  the 
persons  to  whom  the  goods  were  sold  on  account,  conforming  to  the  method  illustrated 
under  accounts  receivable. 

Closing  and  Ruling.  In  the  preceding  illustration  the  sales  book  is  shown  as  ruled 
and  closed  at  the  end  of  a  month's  business. 

The  sales  book  should  be  closed  when  the  bills  for  all  shipments  and  deliveries  of  sales 
for  any  one  month  have  been  made  and  entered.  It  may  be  closed  and  ruled  at  any  time, 
but  this  is  usually  done  at  the  end  of  each  month. 


QUESTIONS  ON  THE  SALES  BOOK 

1.  Write  a  short  description  of  a  merchandise  sales  book.  2.  To  what  account  are  the  footings  of 
this  book  posted?  Which  side?  3.  Are  the  personal  accounts  in  this  trial  balance,  customers'  accounts? 
4.  Could  the  bills  be  made  in  dupUcate  on  the  typewTiter  and  one  copy  sent  to  the  customer  and  one  copy 
kept  in  the  office,  instead  of  keeping  a  regular  sales  book?  Would  the  same  results  be  obtained  if  the 
posting  were  made  directly  from  the  duplicate  bills  to  the  customers'  accounts;  the  bills  then  totaled  and  the 
amount  posted  to  the  credit  of  Merchandise  Sales  account?  5.  Why  is  it  necessary  that  a  record  of  each 
sale  made  should  be  kept?    6.  What  information  should  the  record  of  each  sale  contain? 


EXERCISE  XXII 

Make  out  a  sales  book  from  the  following  transactions,  post,  take  off  a  trial  balance 
as  at  Feb.  28,  19 — ,  and  submit  your  work  for  approval: 


Feb.  12.  The  Homer  Hardware  Co.,  sold  to  May  &  Son,  200  S.  Clark  St.,  4  doz.  No.  61  Night  Latches 
@  $15.50  per  doz.    Terms  30  days. 

15.  Sold  Ames  &  Smith,  builders,  500  S.  State  St.,  6  kg.  8d  Nails  @  $4.75;  2  doz.  Mortise  Locks 
@  $8.60.    Terms  30  days. 

16.  Sold  May  &  Son,  1  doz.  No.  84  Shovels  @  $11.85;  10  kg.  8d  Nails  @  $4.60;  6  rolls  Rubberoid  @ 
$2.20.    Terms  30  days. 

18.  Sold  to  J.  WiUiams  &  Co.,  105  N.  Clark  St.,  15  rolls  Rubberoid  @  $2.20;  3  kg.  6d  Nails  @  $4.90; 

6  3-gal.  Buckets  @  $.65.    Terms  30  days. 
22.  Sold  Ames  &  Smith,  6  rolls  3  Ply  Tar  Roofing  @  $2.10;  4  kg.  20d  Spikes  @  $4.60;  5  gal.  No.  64 

H.  S.  Paint  @  $2.65.     Terms  30  days. 
27.  Sold  Fred  F.  Waters  &  Son,  264  E.  Water  St.,  5  gal.  No.  43  H.  S.  Paint  @  $2.65;  50  Ibi  Puritan 

White  Lead  @  lie;  5  gal.  Linseed  Oil  @  $1.70.  Terms  30  days. 


ABBREVIATIONS  AND  CONTRACTIONS 

Allowances Alls.  Merchandise Mdse. 

Credit  Memorandum Cr.  Memo.  C.  M.  Purchases Pchs. 

Drayage Dge.  Returns Rets. 

Freight  &  Cartage Frt.  &  Ctg.  Returned Retd. 

Inventory Invt. 


36  LYONS'  BOOKKEEPING  AND  ACCOI'NTING 

CASH  ACCOUNT— CASH  BOOK  AND  TRIAL  BALANCE 

A  Check  is  a  written  order  on  a  bank  directing  the  bank  to  pay,  on  demand,  the  sum 
of  money  specified  on  the  check  to  the  order  of  the  party  named  on  the  chsck. 

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Cash  is  the  name  bookkeepers  give  to  currency,  coin,  checks,  bank  drafts,  certificates 
of  deposit,  postal  and  express  money  orders,  received  or  paid  out  by  the  merchant. 

Cash  is  also  the  ledger  account  containing  a  record  of  the  cash  received  and  the  cash 
disbursed.  This  may  be  in  detail  as  in  the  illustrative  cash  account,  page  37,  or  it  may  be 
in  totals. 

CASH  PROBLEMS 

Submit  written  answers  to  the  following: 

1.  During  January,  C.  M.  Hudson  collected  $2,247.50  in  cash  and  paid  out  $1,923.78.  How  much 
did  he  have  on  hand  January  31? 

2.  During  February,  H.  S.  Munson  received  in  cash  the  following  amounts:  $124.65,  $52.73,  $102.50, 
$73.49,  $110.75,  $100.00,  $82.56.  During  the  same  period  he  paid  out  cash  as  follows:  $100.50,  $72.69, 
$83.47,  $53.26,  $84.75,  $142.01.    What  was  his  cash  balance  at  the  end  of  the  month? 

3.  J.  H.  Smith's  cash  transactions  during  March  were  as  follows:  March  1,  received  $115.26;  March  2, 
paid  out  $5.72;  March  4,  received  $100.00;  March  8,  paid  out  $104.73;  March  10,  received  $105.83;  March 
14,  received  $104.50;  March  17,  received  $108.73;  March  21,  paid  out  $111.54;  March  23,  received  $125.32; 
March  30,  paid  out  $103.75.     How  much  did  he  have  on  hand  March  31? 

4.  State  in  writing  how  to  ascertain  the  balance  (cash  on  hand)  if  you  know  the  total  amount  received 
and  the  total  paid  out. 

5.  C.  R.  Grant  began  business  April  1  with  cash  $2,000.00.  During  the  month  he  collected  $876.83  in 
cash  and  disbursed  $357.86.    What  was  his  cash  balance  at  the  end  of  the  month? 

6.  May  1  C.  W.  Barnes  began  business  with  $1,053.47  in  cash.  His  cash  collections  during  the  month 
were  as  follows:  $105.25,  $116.72,  $132.54,  $113.21,  $114.72,  $117.50.  His  cash  payments  during  the 
month  were  $104.25,  $147.36,  $103.73,  $114.52,  $121.14.  How  much  did  he  have  on  hand  at  the  end  of  the 
month? 

7.  State  in  writing  how  to  determine  the  balance  or  cash  on  hand  in  any  business,  at  any  date,  when 
you  know  (a)  the  cash  balance  at  the  beginning  of  the  period;  (b)  the  collections;  (c)    the  disbursements. 

8.  A.  L.  Black  began  business  June  1  with  currency  $1,000.00  which  he  deposited  in  the  bank  to  his 
credit.  He  received  during  the  month  checks  $300.00;  bank  drafts  $200.00;  money  orders  $25.50;  currency 
$50.00;  express  money  orders  $10.00;  all  of  which  were  deposited.     His  payments  during  the  month  were 


BOOKS  OF  ORIGINAL  ENTRY 


37 


all  made  by  checks  drawn  on  his  bank  and  amounted  to  $475.10.     What  was  his  cash  balance  June  30? 
What  was  his  bank  balance? 

9.  July  1,  A.  L.  Black  had  on  hand  the  cash  balance  shown  by  the  previous  problem.  His  collections 
and  payments  for  the  month  of  July  follow:  Collections:  From  sales  of  merchandise  $510.50;  on  James 
Johnson's  account  $50.25;  on  Wm.  Brown's  note  $125.75  and  interest  $10.50;  for  sale  of  house  and  lot 
$3,500.00.  PajTnents:  for  merchandise  $310.25;  rent  $80.00;  janitor  $10.00;  salaries  $125.00;  to  Frank 
Smith  on  account  $100.00.     Find  Black's  cash  balance  July  31. 

10.  Make  a  list  of  all  the  words  used  in  the  foregoing  problems  that  mean  cash  taken  in.  That  mean 
cash  pa.id  out. 

CASH  ACCOUNT 

This  is  an  account  in  which  is  recorded  the  ainount  of  cash  received  and  the  amount 
of  cash  paid. 

EXERCISE  xxm 

Trace  the  cash  received  and  paid,  from  the  transactions  to  the  ilhistrative  Cash 
account : 

Aug.  1.  J.  P.  Wilson,  the  proprietor,  began  business  with  a  cash  investment  of  $1,000.00. 

2.  Rented  store  and  paid  August  rent,  $35.00. 

3.  Bought  goods  of  Wilson  Bros,  for  cash,  $350.00. 

4.  The  cash  sales  for  the  day  were  $61.50. 

5.  The  cash  sales  for  the  day  were  $42.75. 

5.  Paid  $65.00  for  a  second  hand  cash  register. 

6.  Bought  of  Jones  &  Co.  for  cash  goods  amounting  to  $130.75. 

6.  The  cash  sales  for  the  day  were  $53.20. 

7.  The  cash  sales  for  the  day  were  $51.75. 
9.  The  cash  sales  for  the  day  were  $49.50. 


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Purpose.    To  record  the  cash  received  and  the  cash  paid  out. 

Method.     Debit  cash  with  all  cash  received.    Credit  cash  with  all  cash  paid  out. 

Result.    The  difference,  if  any,  is  the  balance  (the  cash  on  hand). 


BALANCING  AND  RULING  THE  CASH  ACCOUNT 

At  the  end  of  a  business  period  the  cash  account  should  be  balanced  and  ruled. 
The  illustrative  cash  account  which  follows  shows  how  this  should  be  done. 


38 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


QUESTIONS  Off  THE  CASH  ACCOUNT 

1.  What  does  the  total  on  the  debit  side  represent?  2.  What  does  the  total  on  the  credit  side  represent? 
3.  What  does  the  difference  between  the  debit  side  and  the  credit  side  represent?  4.  How  may  a  book- 
keeper know  if  the  cash  balance  is  correct?  5.  Should  the  credit  side  of  cash  be  larger  than  the  debit 
side?  Why?  6.  What  would  be  the  condition  of  the  cash  account,  if  all  cash  received  was  paid  out? 
7.  Must  the  debit  side  generally  equal  or  exceed  the  credit  side?  Why?  8.  Would  the  same  results  be 
obtained  if  the  cash  received  and  paid  out  were  recorded  in  a  book,  using  the  left  hand  page  for  collections 
or  receipts  and  the  right  hand  page  for  disbursements  or  payments?  9.  What  name  would  you  give  to  a 
book  containing  a  record  of  receipts  and  payments  of  cash? 


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EXERCISE  XXIV 


Write  up  a  Cash  account  from  the  following  transactions  and  submit  your  work  for 
approval.    Balance  and  rule  it. 


Sep.     1.  Wm.  Reed,  proprietor,  began  business  with  cash  $3,000.00. 
1.  Paid  September  rent,  $45.00. 

1.  Bought  a  bill  of  goods  of  Field  &  Co.  for  cash.     Amount  $675.00, 
1.  Paid  $100  for  a  cash  register. 
1.  Paid  $125  for  office  furniture. 

1.  Paid  for  shelving,  $61.50. 

2.  Cash  sales  for  the  day,  $42.00. 

2.  Bought  of  Farwell  &  Co.  a  bill  of  goods  for  cash.     Amount  $425.50. 

2.  Paid  drayage  charges,  $4.50. 

3.  Cash  sales  for  the  day,  $47.50. 
3.  Paid  for  postage  stamps  $2.00. 

3.  Paid  for  letterheads  and  envelopes  $12.75. 

4.  The  cash  sales  for  the  day  were  $51.20. 

4.  Bought  goods  of  Field  &  Co.  for  cash,  $127.50. 
4.  Paid  for  business  cards  $3.00. 

4.  Paid  for  signs  $19.50. 

5.  The  cash  sales  for  the  day  were  $56.75. 

6.  The  cash  sales  for  the  day  were  $62.25. 
6.  Paid  clerk's  salary  for  the  week,  $15.00. 


CASH  BOOK  39 

CASH  BOOK 

A  Cash  Book  is  a  double  paged  book  of  original  entry  on  the  left  page  or  debit  side 
of  which  is  recorded  the  cash  collected  and  on  the  right  page  or  credit  side  of  which  is 
recorded  the  cash  disbursed.  In  offices  where  all  cash  received  is  deposited  and  all  money 
paid  is  by  check,  the  difference  between  the  two  sides  of  the  cash  book  should  agree  with 
the  bank  balance  as  shown  by  the  check  book. 

In-  most  offices  the  cash  book  is  highly  developed  and  special  columns  with  printed 
headings  are  used.  These  special  columns  are  devised  for  the  purpose  of  lessening  work 
and  of  making  the  books  easy  to  prove. 

POSTING  THE  CASH  BOOK 

The  total  cash  collected  is  posted  to  the  debit  side  of  the  Cash  account  in  the  ledger 
while  each  item  is  posted  to  the  credit  side  of  the  proper  account  in  the  ledger;  thus  the 
ledger  will  show  one  debit  equal  to  the  sum  of  a  number  of  credits.  The  total  cash  dis- 
bursed is  posted  to  the  credit  side  of  the  Cash  account  in  the  ledger  while  each  item  is 
posted  to  the  debit  side  of  the  proper  account  in  the  ledger;  thus  the  ledger  will  show  one 
credit  equal  to  the  sum  of  a  number  of  debits. 

The  posting  of  the  "cash  received"  side  of  the  cash  book,  items  and  total  cash,  is 
exactly  like  the  posting  of  the  purchases  book,  items  and  total  merchandise  purchases. 
The  posting  of  the  "cash  paid"  side  of  the  cash  book,  items  and  total  cash,  is  exactly  like 
the  posting  of  the  sales  book,  items  and  total  merchandise  purchases.  The  initial  of  the 
cash  book  (C),  placed  in  the  explanatory  column  just  to  the  left  of  the  folio  column  of  the 
ledger,  indicates  that  the  entry  originated  in  the  cash  book. 

EXERCISE  XXV 

Trace  the  cash  collected  and  the  cash  disbursed  as  shown  by  the  transactions  in  this 
exercise  to  the  illustrative  cash  book,  then  to  the  ledger  accounts  and  to  the  trial  balance. 
Note  the  manner  in  which  the  cash  book  is  balanced,  ruled,  and  the  balance  brought  down. 

Sep.     1.  H.  M.  Strong,  the  proprietor,  began  a  loan  and  collection  business  with  a  cash  capital  of  $2,150.25 
which  was  deposited  in  the  bank. 

2.  Lent  money  to  Brown  &  Smith  by  issuing  check  for  $504.75. 

3.  Paid  E.  A.  Cummings  &  Co.,  agents,  September  rent  by  check,  $75.00. 

4.  Lent  to  A.  B.  Warner  $102.50,  and  issued  a  check  for  that  amount. 

5.  Gave  a  check  to  James  Wilson  for  cleaning  windows  and  floors  and  doing  some  repair  work,  $8.00. 

6.  Paid  salaries  for  the  week,  $35.25,     Drew  a  check  on  the  bank  for  this  amount,  had  it  cashed  and 
paid  employees  in  currency. 

8.  Received  cash  from  Brown  &  Smith  on  account,  $85;  deposited  it. 

9.  Paid  Telephone  Co.  bill,  $4.50.     Gave  a  check  on  the  bank. 

10.  Lent  to  W.  H.  Wells  $256.25  and  issued  him  a  check  for  that  amount. 

11.  Paid  James  M.  Miller  for  legal  advice,  $15.00;  gave  a  check. 
11.  Brown  &  Smith  paid  on  account  $279.75;  this  was  deposited. 
13.  Paid  salaries  for  the  week,  $35.25;  drew  a  check  for  the  amount. 
13.  Received  from  A.  B.  Warner  on  account  $12.50;  deposited  it. 

15.  Lent  to  Thomas  Brothers  $528.75  and  issued  them  a  check  for  the  amount. 

15.  Paid  A.  B.  Shaw  &  Co.  $12.50  for  a  set  of  books;  gave  a  check  on  the  bank. 

16.  Received  cash  on  account  of  Brown  &  Smith,  $60;  this  was  deposited. 
19.  A.  B.  Warner  paid  $90  on  account;  this  was  deposited. 

21.  W.  H.  Wells  paid  $34.50  on  account;  it  was  deposited. 

24.  Collected  for  T.  F.  Sherman  $246.50;  this  money  was  deposited. 


40 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


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illustrative  Cash  book  entries  were  posted: 


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CASH  BOOK  43 

Purpose.    To  record  the  cash  collected  and  the  cash  disbursed. 
Method.    Enter  all  cash  collected  on  the  receipt  side  and  all  cash  disbursed  on  the 
payment  side. 

Result.    The  difference  is  the  balance. 


BALANCING  AND  RULING  THE  CASH  BOOK 

At  the  end  of  a  month  the  cash  book  should  be  balanced  and  ruled  as  shown  in  the 
illustrative  cash  book.  This  is  also  referred  to  as  closing  the  cash  book.  Study  carefully 
the  form  of  the  ruling  and  compare  it  with  the  ruling  in  the  sales  book  and  purchases  book. 

In  business  the  cash  book  is  footed  in  pencil  at  the  close  of  each  day  and  proved. 
The  difference  between  the  pencil  footings  must  agree  with  the  cash  in  the  bank  as  shown 
by  the  check  book  plus  the  cash  not  deposited. 

QUESTIONS  ON  THE  CASH  BOOK 

1.  What  book  is  posted  similarly  to  the  payment  side  of  the  cash  book?  2.  What  book  is  posted 
similarly  to  the  receipt  side  of  the  cash  book?  3.  If  the  amount  paid  as  shown  by  the  cash  book  was  greater 
than  the  amount  received  as  shown  by  the  cash  book,  what  conclusion  would  you  come  to?  4.  Give  the 
use  of  each  column  in  the  cash  book,  beginning  at  the  left  and  proceeding  toward  the  right.  5.  If  you  were 
a  cashier  and  cashed  a  check  for  someone,  would  you  make  any  entry?  6.  Would  an  entry  be  necessary  if 
you  changed  a  five  dollar  bill  for  someone? 

EXERCISE  XXVI 

Write  up  a  cash  book  covering  the  following  transactions.  Balance,  rule,  put  in  the 
footings  and  bring  down  the  balance,  post  and  take  off  a  trial  balance  as  of  Oct.  20.  Sub- 
mit your  work  for  approval. 

Oct.     1.  The  proprietor,  A.  H.  Arnold,  started  business  by  investing  cash  $2,500.00.    This  money  was 
deposited  in  the  First  National  Bank  to  the  credit  of  Mr.  Arnold. 

2.  Lent  to  Brown  &  Smith  $310.75.     Gave  them  check  on  First  National  Bank. 

3.  Collected  for  Nathan  Hall  $50.25;  cash  not  deposited  in  bank. 

4.  Gave  check  to  E.  A.  Cummings  &  Co.,  Agents,  for  January  rent,  $40.00. 

5.  Collected  for  Henry  A.  Smith,  $35.90.    Deposited  in  the  bank. 

6.  Paid  bookkeeper's  salary  for  the  week  in  cash,  $20.00. 

8.  Paid  cash  for  blank  books,  $3.75. 

9.  Lent  to  Albert  Wilson  $300.00.    Drew  check  for  that  amount. 

10.  Brown  &  Smith  paid  on  account  $25.00;  not  deposited. 

11.  Paid  cash  for  office  towel  supply,  $1.50. 

Mr.  Arnold  wants  to  know  the  cash  balance,  how  much  is  in  the  bank  and  how  much 
in  the  office;  state  in  writing.  Make  all  footings  in  pencil,  and  write  the  cash  book  balance 
in  pencil  just  to  the  left  of  the  folio  column  on  the  cash  received  side  of  the  cash  book. 

EXERCISE  XXVII 

Oct.  13.  Received  from  Brown  &  Smith  on  account  $60.75;  deposited  it. 

15.  Albert  Wilson  paid  on  account  $50.00;  deposited  it. 

16.  Paid  cash  for  postage  stamps,  $3.00. 

17.  Received  letterheads  and  envelopes  ordered.    The  bill  was  $12.50;  gave  check.  ' 

18.  Bought  stationery  (penholders,  pens,  pencils,  etc.)  for  cash,  $2.10, 
20.  Paid  bookkeeper's  salary  for  the  week  in  cash,  $20.00. 


44  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

THE  JOURNAL  AND  TRIAL  BALANCE 

Almost  every  business  has  something  to  sell  and  likewise  must  purchase  something 
before  a  sale  can  be  made.  These  two  classes  of  transactions,  together  with  the  payment 
of  the  personal  accounts  they  create,  constitute,  by  far,  the  cause  of  the  vast  majority  of 
entries  on  any  set  of  books  used  by  a  mercantile  or  manufacturing  concern. 

Therefore  it  was  the  natural  result  of  progress  that  the  entries  resulting  from  all 
similar  transactions  should  be  made  in  one  book,  and  that  that  book  was  named  for  the 
transactions  which  were  recorded  in  it.  Hence,  we  find  a  record  of  sales  on  account  made 
in  a  sales  book,  a  record  of  purchases  on  account  made  in  a  purchases  book,  and  a  record 
of  cash  received  and  disbursed  made  in  a  cash  book.  But,  there  still  remain  the  entries 
for  a  large  number  of  transactions  which  can  not  be  included  in  any  of  the  above  named 
books. 

So,  at  the  present  time,  the  journal  is  used  as  the  book  of  original  entry  for  trans- 
actions not  conveniently  recorded  in  any  of  the  other  books  of  original  entry.  Among 
these  are  the  entries  necessary  in  opening  a  set  of  books  where  the  original  investment 
consists  of  items  other  than  cash,  entries  to  make  corrections  and  entries  to  make  adjust- 
ments.   The  word  "Journal"  should  be  written  or  printed  at  the  top  of  each  page. 

The  Ruling  of  the  Journal  generally  consists  of  a  column  for  the  date,  a  column  for 
ledger  folios,  a  broad  column  for  entries,  and  at  least  two  amount  columns,  one  for  the 
debit  and  one  for  the  credit  of  the  entry.  Paper  ruled  as  shown  in  the  illustrative  journal 
page  49  is  called  journal  paper.  Frequently  large  stationery  stores,  carry,  in  stock,  journal 
paper  that  has  from  two  to  twenty-four  amount  columns. 

To  Journalize  is  to  determine  the  accounts  affected  by  the  transaction,  correction,  or 
adjustment.  The  formal  expression  or  writing  in  the  journal  of  the  result  of  the  transac- 
tion, correction,  or  adjustment  is  also  called  journalizing.  In  each  journal  entry  there  should 
be  one  or  more  debits  and  one  or  more  credits,  but  in  all  cases  the  debit  or  total  debits 
should  equal  in  amount  the  credit  or  total  credits.  One  line  should  be  left  between  a 
journal  entry  with  its  explanation  and  the  following  journal  entry  with  its  explanation. 
For  the  arrangement  of  the  entries,  see  the  illustrative  Journal,  page  49. 

Explanations  should  follow  every  journal  entry.  These  explanations  should  be  clear 
and  concise  as  they  remain  the  permanent  record  of  the  cause  of  the  entry  and  frequently 
require  several  lines  to  state  the  facts.  Study  the  illustrative  journal  entries  for  the  use 
of  explanations  and  also  for  their  location  with  reference  to  the  entries. 

POSTING  THE  JOURNAL  ENTRIES 

Each  debit  amount  in  a  journal  entry  is  posted  to  the  debit  side  of  its  account  m 
the  ledger  and  each  credit  amount  in  a  journal  entry  is  posted  to  the  credit  side  of  its 
account  in  the  ledger. 

But,  it  should  be  remembered  that,  since  a  variety  of  entries  are  made  in  the  journal, 
it  is  not  a  sufficient  explanation  of  the  transaction  to  place  "J,"  the  initial  of  the  journal, 
in  the  explanatory  column  of  the  ledger.  Instead,  the  opposite  side  of  the  entry  (as  a  rule) 
should  be  used  as  the  explanatory  matter.  If  some  such  method  of  explanation  is  not 
used,  it  is  necessary  to  look  into  the  journal  for  each  reference  to  determine  the  nature 
of  the  transaction  that  affected  the  account. 

Study  carefully  the  explanations  in  the  illustrative  accounts  showing  the  postings  of 
the  journal  entries. 


THE  JOURNAL  AND  TRIAL  BALANCE 


45 


A  set  of  books  consisting  only  of  journal  and  ledger  could  be  used  to  record  all  the 
transactions,  double  entry,  of  a  business  but  the  work  is  greatly  lessened  by  using  other 
books. 

USE  OF  JOURNAL  ILLUSTRATED 

EXERCISE  XXVIII 

Trace  the  following  transactions  to  the  journal  and  ledger.  Study  each  journal  entry 
and  compare  it  with  the  entry  that  would  be  made  to  record  the  same  transaction  in  the 
sales  book,  purchases  book,  or  cash  book. 

Aug.  8,  19 .    Goods  bought  of  Brown  &  Smith  on  account  were  received:   date 

of  invoice  Aug.  4,  19 — ,  amount  $48.25.     As  illustrated  on  page  31.     Merchandise  Pur- 


chases account  must  be  debited  with  S48.25  and  Brown  &  Smith's  account  must  be 
credited  with  $48.25. 

Entering  this  transaction  in  the  purchases  book,  posting  the  item  to  the  credit  of 
Brown  &  Smith's  account,  and  including  it  in  the  footing  posted  to  the  debit  of  Merchandise 
Purchases  account  conform  to  the  principles  illustrated  on  page  31. 

The  entry  for  this  transaction,  if  made  in  the  journal  instead  of  in  the  purchase  book, 
conforms  to  the  same  principle  but  would  be  as  follows: 


CZu^ 


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The  above  Journal  Entry  is  read  Merchandise  Purchases  to  Brown  &  Smith  $48.25. 
The  debit  amount  is  posted  to  the  debit  of  Merchandise  Purchases  account  as  follows : 


//^Z'€^.<d,.^^  (j>uyl<>A.^cL^L^^ 


.!£=- 


The  credit  amount  is  posted  to  the  credit  of  Brown  &  Smith's  account  as  follows; 


"^ctya 


r  ^-^f^yz-z^ 9^ 


^f.ts 


The  posting  of  the  debit  and  credit  amounts  is  of  primary  importance:  the  entering 
of  the  explanations  is  secondary. 


46 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


Aug.  10,  19 — .  Sold  a  bill  of  goods  to  A.  W.  Franklin  on  account,  amount  $118  25. 
As  illustrated  on  page  34,  Merchandise  Sales  account  must  be  credited  with  $118.25 
and  A.  W.  Franklin's  account,  must  be  charged  with  $118.25. 

Entering  this  transaction  in  the  sales  book,  posting  the  item  to  the  debit  of  A.  W. 
Frankhn's  account,  and  including  it  in  the  footing  posted  to  the  credit  of  Merchandise 
Sales  account  conform  to  the  principle  illustrated  on  page  33. 

The  entry  for  this  transaction,  if  made  in  the  journal  instead  of  in  the  sales  book, 
conforms  to  the  same  principle  but  would  be  as  follows: 


{e<^-C^.yt-'7^t'<:Z.^ 


"9- 


n^ 


A»r-4ii\ 


-w-*W 


<^^^^7j 


',/C 


//<P 


zs 


//f 


2*S- 


The  posting  of  this  journal  entry  is  as  follows: 


C^l^y^y^Sh^z^<^-2^^/%^^^c^^ 


^^co€f  /  0Y?U;6d..^^ 


~7777I 


7?U^l^Uyj2f^z^i^ 


/f- 


^«i^ 


/O    i^-^'^S2^^^-SZ-1>t,-<'^<^>?Z--' 


f  /  fZS 


Aug.  12,  19 — .  Paid  Chas.  Smith,  clerk,  salary  for  the  week  ended  today,  amount 
$20.00.  As  illustrated  on  page  41,  cash  must  be  credited  with  $20.00  and  General 
Expense  must  be  debited  with  $20.00. 

Entering  this  transaction  in  the  cash  book,  posting  the  item  to  the  debit  of  General 
Expense  account,  and  including  it  in  the  footing  posted  to  the  credit  of  Cash  account 
conform  to  the  principle  illustrated  on  page  41. 

The  entry  for  this  transaction,  if  made  in  the  journal  instead  of  in  the  cash  book, 
conforms  to  the  same  principle  but  would  be  as  follows: 


THE  JOURNAL  AND  TRIAL  BALANCE 


47 


^m 


=ar 


no 


^Zs^-tfj 


/I 


/Z 


oo 


X0 


0  0 


The  posting  of  the  jourfaal  entry  follows: 


^f- 


^z**^ 


/I^    I     17 


oo 


't^-^Z-e^^^ 


^f- 


l^lcc^  f 2r[i^A^a^^S^79z^eJt^.'^i^  V^x 


ZO  OO 


The  explanations  used  are  alike  in  both  ledger  accounts. 

Take  a  trial  balance  of  the  accounts  to  which  the  preceding  journal  entries  were 
posted,  using  the  form  given  here  (you  are  to  supply  the  amounts),  and  submit  your 
work  for  approval. 


TRIAL  BALANCE  AUG.  12.  19-. 

Mdse    Purchases 

Brown  &  Smith 

A.  W.  Franklin 

Mdse  Sales 

Cash 

General  Expense 

Purpose.  To  record  transactions,  transfers,  adjustments  and  investments  at  the 
beginning  of  business,  except  cash  investments. 

Method.  Write  the  date,  the  name  of  the  account  to  be  debited,  and  in  the  left  hand 
amount  column  the  debit  amount.  On  the  next  line  write  the  name  of  the  account  to  be 
credited  and  in  the  right  hand  amount  column  the  credit  amount.  Use  one  line  for  each 
debit  entry  and  one  line  for  each  credit  entry.  An  explanation  follows  the  formal  journa/ 
entry  stating  the  purpose  for  which  the  entry  is  made. 

Posting.  Each  debit  amount  is  posted  to  the  debit  of  the  proper  ledger  account  and 
each  credit  amount  is  posted  to  the  credit  of  the  proper  ledger  account,  together  with  date, 
explanation,  and  page  of  the  journal. 


48 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


USE  OF  JOURNAL  IN  OPENING  BOOKS 

When  a  person  begins  business  for  himself,  he  should  make  out  a  statement  of  the 
money,  accounts  and  other  properties  that  he  is  investing,  together  with  his  debts.  No 
matter  how  crude  the  statement  is,  it  will  greatly  assist  the  bookkeeper  in  preparing  the 
opening  entry. 

EXERCISE  XXIX 

Study  the  following  illustrations  of  the  use  of  the  journal  in  opening  entries. 

Sep.  1.  M.  M.  Hopkins  began  business  with  the  following  assets  and  liabihties:  A.  R.  Wilson  owes  him 
on  account  $875.00  and  C.  D.Williams,  $325.50 ;  his  inventory  of  merchandise  amounts  to  $.3,500.00. 
Mr.  Hopkins  owes  S.  B.  Cummings  $100.00  and  W.  B.  Ross  $257.25,  both  on  account. 

M.  M.  Hopkins'  Statement  of  Assets  and  Liabihties  covering  the  above  facts  follows: 


^^^  j^;^^ 


.^^7^^  rr?  rfTY  rf^  /^   /  *^ 


\3S'o  o 
3  2- 


o  o 


/  O  O 


-A^ 


2-^ 


V/  o  o 


3s:i 


^J  ^3 


J-o 


2S 


XS 


The  journal  entry,  if  only  the  journal  and  ledger  are  used,  follows: 


2.'c:^.A'^^^^:V7^u^^-e^^>■^^^?!^^ 


3J~o  o 
3  XJ'Kfo 


'J"  a 


/  o  o 


o  o 
2.^ 


THE  JOURNAL  AND  TRIAL  BALANCE 


40 


Where  there  are  partners  in  the  business,  separate  entries,  similar  to  the  preceding 
journal  entry,  should  be  made  for  the  investment  of  each  of  them, 

USE  OF  JOURNAL  IN  MAKING  CORRECTIONS,  ADJUSTMENTS 
AND  RECORDING  TRANSACTIONS 

EXERCISE  XXX 

Trace  the  following  transactions  to  the  illustrative  journal  entries  and  the  posting 
from  the  journal  to  the  accounts  in  the  ledger.  Then  trace  the  accounts  in  the  ledger  to 
the  illustrative  trial  balance  which  follows. 

The  journal  has  been  given  12  as  the  page  number,  and  the  pages  of  the  ledger  accounts 
are  shown  at  the  right  of  the  headings. 

July  L  J.  p.  Wilson,  proprietor,  made  an  investment  consisting  of  4  J4  per  cent  Liberty  Bonds.  Amount, 
$2,000.00. 
5.  Merchandise  amounting  to  $142.50  was  sold,  billed  and  shipped  to  A.  W.  Johnson,  Portland,  Me., 
on  June  20, 19 — .  Through  an  error  in  posting,  this  sale  was  charged  to  another  customer's  account, 
A.  W.  Johnson,  Paducah,  Ky.  The  error  was  discovered  and  then  corrected  by  a  Journal  entrj'. 
10.  Bennett  &  O'Brien,  customers  at  Indianapolis,  Ind.,  claim  a  shortage  in  the  shipment  to  them 
June  25  of  100  booklets  @  6J^c  amounting  to  $6.50.  The  claim  has  been  allowed,  a  credit  memo- 
randum sent  to  Bennett  &  O'Brien,  and  the  bookkeeper  instructed  to  make  an  entry  covering  the 
allowance. 

Journal  entries  covering  these  transactions  follow: 


12 


/■■^ 


/o 


2.// 


I  >  n     \A  Mm 


L   r  n        un   K 


'US' 


C3 


/^Z 


J-o 


n 


So 


^o 


2-0  o  o 


/  A<  2- 


n 


^o 


So 


S'o 


50 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


15.  Merchandise  received  from  the  Boston  Manufacturing  Co.,  Lynn,  Mass.,  checked  with  the  order 
for  them  and  with  their  invoice  dated  June  27,  19-  amounting  to  $475.25.  This  was  entered  in 
the  Mdse.  Purchases  Book  and  credited  to  their  account.  Afterwards  it  was  found  that  the  goods 
were  not  up  to  the  standard,  and  the  Boston  Manufacturing  Co.  made  an  allowance  of  $87.50, 
sending  a  credit  memorandum  dated  July  12,  the  amount  of  which  is  to  be  charged  to  their  account 
through  the  Journal. 

Ledger  accounts  resulting  from  posting  the  above  journal  entries  follow: 


^f- 


2 


EXPLANATION 


45 


13^ 


'olio     II       AMOUN 

/2-\i-o  O  O^  O 


iJ^ 


DATS    I  I  EXPLANATION 


TSBT 
/2. 


TSBSaSf 

2.0 o  o 


/7Z-g:^e£-<£^  /^2^>i^^<z^^i'C'Z:;Z^<:/t£</ 


iXr_ 


63 


/J-  -^cfdyiiiryt^P^T^  (^         0- 


54 


3-i^ 
"f-' 


J-o 


■'^e^yu>^L£.^y'Oi(^UA^  JA/Z- 


S'o 


148 


/^:^^^^t:^-^-'?^<r?z^  //7 £Z^^ 


/s 


EXPLANATION 


/ 


FoBofj 


MOUNT 


]^^^-^-^^^i5Z-'?^-?^^#y^ 


EXPLANATION 


£t^i..,^-:^t:^y:.s'  Jl 


Polio 


AMOUNI 


THE  JOURNAL  AND  TRIAL  BALANCE 


51 


/^:^Ce.<n^^?-2,.-e.:^?^:^  )^  (J^^ 


160 


EXPLANATION 


FoHs  AMOUNT 


-St^J'/if^/t^Uvt^r^^^tMfi      ^1^''"  LI  ^^ 


d\  /^    /^A'i^Sc^^ 


The 


fully  explained  and  the  entries  for  the 


le  use  of  the  journal  in  making  transfers  is 
transfers  illustrated  in  the  following  chapter. 

The  trial  balance  taken  of  the  above  ledger  accounts,  proving  the  accuracy  of  the 
posting  from  the  journal  and  showing  that  the  books  are  kept  double  entry,  follows: 


^ 


m 


/ 
2- 

n 

3/ 


loo  0 


^J-o 


^7 


/  ^z^o 


ZZ3C 


O  o 


^o 


^c 


Zoc>  o 


^7 


ZZJ  (^ 


o  o 


<ro 


S'o 


BALANCING  AND  RULING  THE  JOURNAL 

The  journal  as  illustrated  here  is  seldom  ruled  and  totaled.  Some  bookkeepers,  how- 
ever, foot  the  amount  columns,  in  pencil  only,  to  determine  whether  the  journal  entries 
balance.  If  the  journal  entries  should  not  balance,  there  would  be  no  need  of  posting  the 
entries  until  the  error  was  located  and  corrected.  This  method  is  particularly  advisable 
in  using  a  journal  that  has  several  amount  columns. 


QUESTIONS  ON  THE  JOURNAL 

1.  Define  Journal.     2.  Journalizing.     3.  Journal  entry  explanations.    4.  Could  the  Journal  be  used 
as  the  only  book  of  original  entry?     5.  Is  this  desirable?     Why?     6.  What  does  a  statement  of  assets  and 


52  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

liabiUtieg  contain?  WTiat  is  the  difference  between  the  assets  and  liabilities  called?  7.  What  is  a  credit 
memorandum?  8.  What  is  meant  by  checking  an  invoice?  9.  In  Exercise  XXX  it  is  stated  that  goods 
were  charged  to  A.  W.  Johnson,  Paducah,Ky.,  June  20,  19 —  when  they  should  have  been  charged  to  A.W. 
Johnson,  Portland,Me.,  and  the  error  was  not  found  and  corrected  until  July  5, 19 — .  Would  the  trial  balance 
taken  June  30,  19 —  balance?  Why?  10.  Explain  the  difference  between  the  entries  if  made  in  the  journal 
and  the  entries  for  the  same  transaction  if  made  in  the  Cash  book.  The  merchandise  sales  book.  The 
merchandise  purchases  book.  11.  If  a  journal  entry  had  several  debits  and  several  credits  chould  the 
amount  of  the  debits  equal  the  amount  of  the  credits?  12.  How  would  you  know  if  the  journal  balanced? 
13.  Total  the  four  illustrative  journal  entries  on  page  49  and  compare  your  results  with  the  totals  of  the 
trial  balance  on  page  51. 

EXERCISE  XXXI 

Journalize  the  following  transactions,  post,  take  off  a  trial  balance,  and  submit  your 
work  with  written  answers  to  the  questions  for  approval. 

Aug.  1.  W.  B.  Hays  assigns  to  the  partnership  of  Hays  &  Harrison  an  account  due  him  from  Wilson  & 
Co.  for  $1,286.47.     This  sum,  is  to  be  an  additional  investment. 

10.  Wm.  Watson,  a  customer,  claims  a  clerical  error  of  $10.00  was  made  in  a  bill  to  him  dated  July  15. 
This  was  looked  up  and  his  claim  found  to  be  correct  as  the  bill  was  too  large  by  $10.  A  credit 
memorandum  was  sent  him  antl  the  bookkeeper  instructed  to  make  the  proper  correcting  entry. 

15.  On  rechecking  a  bill  of  goods  bought  of  Williams  &  Co.,  dated  July  25,  to  the  amount  of  $287.50 
and  entered  in  July,  an  error  of  $20.00  was  found  in  the  extensions;  the  bill  should  have  been 
$267.50.  Williams  &  Co.  were  written  concerning  the  mistake  and  agreed  to  send  us  a  credit 
memorandum  covering  this  error.     Make  the  proper  correcting  entry. 

20.  A  credit  memorandum  was  issued  today  and  sent  to  Wm.  Watson,  a  customer,  for  $18.50  to 
cover  claim  for  breakage  on  account  of  goods  billed  and  shipped  Aug.  11.  These  goods  were 
improperly  packed. 

A  GENERAL  RULE 

In  the  progress  of  the  student  as  he  has  considered  each  separate  account,  he  has 
reached  certain  conclusions  and  formulated  his  own  rules  as  to  what  should  be  debited 
to  each  account  and  what  should  be  credited  to  each  account.  Instead  of  trying  to  Remem- 
ber all  these  rules  for  entries  in  each  account,  it  will  be  more  satisfactory  for  him  to  be 
familiar  with  the  application  of  a  general  rule  for  debiting  and  crediting  any  account. 
This  general  rule  follows: 

Debit  that  which  is  received,  who  or  what  costs  value. 

Credit  that  which  is  disposed  of,  who  or  what  produces  value. 

The  student  should  now  study  each  kind  of  an  account  treated  in  this  book,  up  to 
this  point,  by  beginning  with  the  personal  account  on  page  6.  In  this  manner  he  can 
satisfy  himself  that  the  general  rule  given  here  will  cover  any  and  all  special  rules  which 
he  has  formulated  for  debiting  and  for  crediting  any  of  these  accounts. 

ORAL  EXERCISE  XXXII 

Study  the  following  transactions  and  be  prepared  to  make  quickly  the  entries  covering 
them,  if  only  a  journal  were  used. 

1.  A.  B.  Pratt  and  A.  B.  Whitney,  partners,  begin  business  with  the  following  assets  and  liabilities' 
A.  B.  Pratt  invests  cash  $10,000.00;  A.  B.  Whitney  invests  cash  amounting  to  $10,000.00. 

2.  Paid  one  month's  rent,  $100.00. 

3.  Bought  goods  of  Field  &  Co.  on  account,  $2,350.00. 


THE  JOURNAL  AND  TRIAL  BALANCE  63 

4.  Paid  freight  on  the  goods  bought  of  Field  &  Co.,  $39.75. 

5.  Paid  cartage  from  freight  house  to  store  on  goods  bought  of  Field  &  Co.,  $6.50. 

6.  Paid  payroU  for  the  week,  $81.75. 

7.  A.  B.  Pratt  drew  for  personal  use,  $100.00. 

8.  A.  B.  Whitney  took  from  the  store  for  his  personal  use  goods  which  cost  the  firm  $75.40. 

9.  Sold  goods  to  Geo.  Chapman  on  account,  $80.20. 

10.  Sold  goods  to  E.  N.  Bragdon  on  account,  $135.10. 

11.  Bought  postage  stamps,  $20.00. 

13.  Geo.  Chapman  returned  part  of  the  goods  sold  him,  and  we  issued  a  credit  memorandum  for  $18.25. 

14.  E.  N.  Bragdon  returned  part  of  the  goods  sold  him,  and  a  credit  memorandum  was  sent  him, 
amount,  $14.50. 

15.  Paid  Field  &  Co.  on  account  $1,000. 

16.  Paid  a  cartage  bill  on  goods  sold  to  E.  N.  Bragdon,  amount,  $3.50. 

17.  Made  a  claim  to  Field  &  Co.  that  part  of  the  goods  bought  of  them  was  not  satisfactory.    After 
some  correspondence  they  allowed  $17.50  and  sent  a  credit  memorandum  for  that  amount 

ABBREVIATIONS  AND  CONTRACTIONS 

Adjustment Xdj.  Transfer Tfr. 

Journal Jour,  or  J. 


CORRECTION  OF  ERRORS 

If  you  know  what  j'ou  are  doing  and  are  careful  there  is  no  excuse  for  making  an  error. 
Errors  result  from  either  ignorance  or  carelessness. 

Nevertheless  errors  are  sometimes  made,  and  it  is  important  to  know  how  to  correct 
them  properly. 

IN  BOOKS  OF  ORIGINAL  ENTRY 

If  the  error  is  in  a  book  of  original  entry  and  is  discovered  before  it  has  been  posted, 
it  should  be  corrected  by  drawing  a  single  red  line  through  each  incorrect  amount,  and 
the  correct  figures  placed  just  above  in  black  ink.  Or  if  the  account  charged  or  credited 
is  the  wrong  account,  the  correction  should  be  made  by  drawing  a  single  red  line  through 
the  wrong  entry  and  writing  in  the  correct  entry  in  black  ink. 

If  the  error  is  not  discovered  until  it  is  posted,  the  correction  should  be  made  in  a  book 
of  original  entry,  and  the  explanation  should  state  clearly  the  nature  of  the  error  and  a 
reference  to  the  entry  it  is  intended  to  correct.  In  no  case  should  an  erasure  appear  in  a 
book  of  original  entry.  Books  are  sometimes  taken  into  court  as  evidence  and  erasures 
in  them  may  destroy  their  value  as  evidence. 

IN  A  LEDGER 

The  same  general  plan  of  correcting  errors  in  books  of  original  entry  should  also  be 
followed  in  correcting  errors  in  a  ledger. 


54  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

CLOSING  THE  LEDGER 

At  the  end  of  a  fiscal  period  it  is  the  custom  in  almost  every  business  house,  large  or 
small,  to  "close  the  books"  as  it  is  called.  This  is  a  very  necessary  part  of  the  routine  of 
a  fiscal  period.  Most  business  houses  close  the  books  December  31  of  each  year,  or  on 
June  30  of  each  year,  in  order  to  determine  the  amount  of  the  net  gain  or  the  net  loss  for 
the  previous  fiscal  period.  This  practice  has  been  generally  followed  since  the  Income 
Tax  Law  was  enacted  by  the  Congress  of  the  United  States. 

Closing,  or  "Closing  the  Ledger,"  is  the  process  of  assembling  in  one  account  the  whole 
balance  or  a  part  of  the  balance  of  all  that  group  of  accounts  known  as  the  operating  or 
profit  and  loss  accounts.  This  includes  all  accounts  that  show  profit,  or  income,  expenses, 
losses,  and  costs. 

Closing  accounts  and  "closing  the  ledger"  must  not  be  confused  with  closing  the 
special  books  of  original  entry,  as  explained  in  preceding  chapters  of  this  book. 

CLOSING  AN  ACCOUNT 

Purpose.  To  transfer  the  balance  or  a  part  of  the  balance  of  an  account  to  the  same 
side  of  some  other  account. 

Method.  If  the  balance  of  an  account  is  a  debit,  the  whole  balance  or  a  part  of  it 
may  be  transferred  to  the  debit  side  of  some  other  account.  If  the  balance  of  an  account 
is  a  credit,  the  whole  balance  or  a  part  of  it  may  be  transferred  to  the  credit  side  of  some 
other  account. 

In  this  textbook,  the  journal  entry  method  of  closing  is  illustrated  and  explained 
because  it  is  the  method  very  generally  used  by  public  accountants. 

RULING  A  CLOSED  ACCOUNT 

After  an  account  is  closed  it  should  be  ruled,  as  the  ruling,  when  properly  done,  adds 
to  the  appearance  of  the  books.  For  this  purpose  it  is  advisable  to  use  red  ink,  though 
black  may  be  used. 

Purpose.     To  set  off  in  approved  form  the  closing,  also  to  balance  accounts. 

Method.  Rule  a  single  red  line,  on  the  last  blue  line  upon  which  an  amount  is  written, 
cutting  both  the  debit  and  the  credit  amount  columns  only.  On  the  first  blue  line  below 
the  one  used  for  the  single  red  line,  rule  the  upper  of  double  lines  cutting  the  whole  account 
except  the  explanatory  columns.  Rule  the  lower  of  the  double  red  Unes  as  close  as  possible 
to  the  upper  one  without  touching  it. 

After  an  account  has  been  closed  and  ruled,  the  amounts  composing  it  should  no 
longer  affect  the  ledger,  and  so  far  as  future  transactions  and  entries  are  concerned  that 
portion  of  the  account  is  no  longer  in  existence. 

The  accounts,  treated  so  far  in  this  book,  that  are  closed  or  affected  by  closing  are: 
Merchandise  Inventory,  Merchandise  Purchases,  Merchandise  Sales,  Profit  &  Loss, 
General  Expense,  and  Proprietor's  Capital.  All  other  accounts  that  have  been  introduced, 
are  balanced. 

CLOSING  MERCHANDISE  PURCHASES  ACCOUNT 

Before  this  account  is  closed  it  is  necessary  to  make  an  adjustment  in  it  to  obtain  the 
cost  of  goods  sold.  In  order  to  do  this  it  is  necessary  to  obtain  information  not  contained 
in  the  ledger  itself  but  secured  by  making  an  inventory  of  merchandise  on  hand. 


CLOSING  THE  LEDGER 


55 


By  referring  to  the  illustrative  accounts  in  the  chapter  on  merchandise,  page  24,  the 
student  will  find  the  amounts  that  are  used  in  the  following  illustrations. 

The  method  of  finding  the  cost  of  goods  sold  is  illustrated  on  page  26,  and  we  should 
now  give  effect  to  this  calculation  by  means  of  the  following  journal  entry: 


Mar  31 

Mdse  Inventory 
Mdse  Purchases 
To  record  the  inventory  of  merchandise  Mar.  31  19-. 

15997.73 

15997.73 

The  debit  amount  of  this  journal  entry  is  posted  to  Merchandise  Inventory  account 
and  is  illustrated  on  page  25.  The  posting  of  this  entry  is  really  the  beginning  of  that 
account. 

When  the  credit  amount  of  this  entry  is  posted  the  Merchandise  Purchases  account 
will  stand  as  follows,  so  that  the  balance  of  the  account  will  be  the  cost  of  goods  sold: 


MERCHANDISE  PURCHASES 


Mar.  31 

Net  Purchases 

58657.25 

Mar.  31 

Mdse  Invt. 

15997.73 

Refer  to  the  Merchandise  Purchases  account  on  page  24  where  it  was  illustrated 
as  balanced  and  ruled  but  not  closed,  and  you  will  note  the  amount  of  net  purchases  brought 
down. 

Since  the  balance  of  Merchandise  Purchases  account  will  now  show  the  cost  of  goods 
sold  it  is  closed  by  posting  the  following  journal  entry: 


Mar.  31 


Mdse  Sales 
Mdse  Purchases 
To  close  the  latter  account  and  transfer  the  cost  of  goods  sold 


42659.52 


42659.52 


When  the  credit  amount  of  this  journal  entry  is  posted  the  Merchandise  Purchases 
account  will  be  closed  and  should  be  ruled  as  shown  by  the  following  illustration: 


MERCHANDISE  PURCHASES 


Mar.  31 


Net  Purchases 


58657.25 


58657.25 


Mar.  31 
31 


Mdse  Invt. 

Cost  of  Goods  Sold 


15997.73 
42659.52 


58657.25 


CLOSING  MERCHANDISE  SALES  ACCOUNT 

When  the  debit  amount  of  the  preceding  journal  entry  is  posted  the  cost  of  goods 
sold  will  appear  in  the  Merchandise  Sales  account  as  shown  by  the  following  illustration. 
Observe  that  this  illustration  is  but  a  continuation  of  the  .'♦Icrchandise  Sales  account  that 
was  balanced  and  ruled  on  page  28. 


86 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 

MERCHANDISE  SALES 


Mar.  31 


Cost  of  Goods  Sold 


42659.52 


Mar.  31 


Net  Sales 


57811.70 


This  account  when  balanced  as  in  the  illustration  on  page  28  showed  the  amount 
of  the  net  sales.  It  now  shows  the  cost  of  goods  sold  as  well,  and  is  closed  by  posting  the 
following  journal  entry: 


Mar.  31 


,Mdse  Sales 
Profit  &  Losa 
To  close  the  former  amount  and  transfer  the  gross  profit 


15152.18 


15152.18 


When  the  debit  amount  of  this  journal  entry  is  posted  the  Merchandise  Sales  account 
will  be  closed  and  should  be  ruled  as  shown  by  the  following  illustration,  which  is  but  a 
continuation  of  the  Merchandise  Sales  account  shown  on  page  28: 


MERCHANDISE  SALES 


Mar.  31 
31 


Cost  of  Goods  Sold 
Gross  Profit 


42659.52 
15152.18 


57811.70 


Mar.  31 


Net  Sales 


57811.70 


57811.70 


By  posting  the  credit  amount  of  this  journal  entry  the  gross  or  merchandise  profit 
will  be  transferred  to  the  Profit  &  Loss  account.  This  amount  is  sometimes  known  as  a 
trading  profit. 

QUESTIONS  ON  CLOSING  TtiE  MERCHANDISE  ACCOUNTS 

1.  Write  the  entry  (without  amounts)  by  which  the  cost  of  goods  sold  is  obtained.  2.  How  do  you 
obtain  the  amount  of  the  inventory  at  the  end  of  a  fiscal  period?  3.  What  is  the  amount  called  that 
closes  the  Merchandise  Purchases  account?  4.  What  is  the  amount  called  that  is  transferred  into  the 
Merchandise  Sales  account?  5.  Write  the  entry  (without  amounts)  that  transfers  the  cost  of  goods 
sold  into  the  Merchandise  Sales  account?  6.  What  is  the  amount  called  that  closes  the  Merchandise 
Sales  account? 


CLOSING  GENERAL  EXPENSE  ACCOUNT 

On  page  18  the  General  Expense  account  is  shown  with  only  pencil  footings  and 
the  balance  of  the  account  also  in  pencil.  No  adjustment  or  change  whatever  is  made  in 
it,  but  the  following  journal  entry  is  then  made  for  transferring  the  balance  of  it  to  the 
Profit  &  Loss  account: 


Sep.  30 

Profit  &  Loss 
General  Expenses 

To  close  the  latter  account  and  transfer  it  to  Profit  & 
Loss  account. 

232.75 

232.75 

CLOSING  THE  LEDGER 


67 


When  the  credit  amount  of  this  journal  entry  is  posted  the  General  Expense  account 
will  be  closed  and  should  be  ruled  as  shown  by  the  following  illustration: 


GENERAL 

EXPENSE 

Sep.  30 

236.00 

Sep.  30 
30 

Profit  &  Loss 

3.25 
232.75 

236.00 

236.00 

CLOSING  PROFIT  &  LOSS  ACCOUNT 

When  the  debit  amount  of  the  last  journal  entry  is  posted  the  Profit  &  Loss  account 
will  stand  as  follows: 

PROFIT  AND  LOSS 


Sep.  30 


General  Expense 


232.75 


Sep.  30 


Gross  Profit 


700.35 


You  will  observe  that  the  illustration  above  is  the  same  as  that  given  on  page  17 
which  is  the  result  of  the  transactions  shown  in  the  exercise  on  page  16.  The  following 
journal  entry  is  then  made  for  closing  this  account: 


Sep.  30 


Profit  &  Loss 

H.  M.  Strong,  Proprietor 
To  close  the  former  account  and  transfer  the  net  profit. 


467.60 


467.60 


When  the  debit  amount  of  this  journal  entry  is  posted  the  Profit  &  Loss  account  will 
be  closed  and  should  be  ruled  as  shown  by  the  following  illustration: 


PROFIT  AND  LOSS 

Sep.  30 
30 

General  Expense 
Net  Profit-H  M  S 

232.75 

467.60 

Sep.  30 

Gross  Profit 

700.35 

700.35 

700.35 

The  posting  of  the  credit  amount  of  this  journal  entry  brings  the  net  profits  for  the 
period  into  the  account  of  H.  M.  Strong,  Proprietor.  The  proprietor's  account  is  then 
balanced,  ruled,  and  the  balance  brought  down  as  in  the  illustration  on  page  14. 


QUESTIONS  ON  CLOSING  AND  RULING  PROFIT  AND  LOSS  ACCOUNTS 

1.  Why  are  the  accounts  that  show  profits  and  those  that  show  losses  closed?  2.  Are  these  accounts 
closed  by  recording  entries  for  transactions?  3.  What  is  the  result  of  closing  one  of  these  accounts?  4.  How 
are  they  closed?  5.  Describe  the  form  of  ruling  when  one  of  these  accounts  is  closed.  6.  Make  a  list  of 
the  accounts  closed.  7.  Make  a  list  of  the  accounts  affected  by  closing,  but  not  closed.  8.  Does  the  ruling 
or  the  posting  of  the  entry  close  the  account? 


58 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 
CLOSING  DIAGRAM 


INVENTORY 

v/ 

MDSE.  PURCHASES 

N/ 

GENERAL  EXPENSE 

4 

MDSE.  SALES 

S/- 

N/ 

PROFIT  AND  LOSS 

\/ 

PROPRIETORS  CAPITAL 

The  above  diagram  represents  the  order  in  which  the  profit  and  loss  accounts  are 
closed  and  the  net  profit  or  the  net  loss  brought  into  the  proprietor's  account.  The  student 
should  memorize  the  order  of  this  procedure. 


EXERCISE  XXXIII 


Look  in  your  outfit  of  supplies  and  get  Test  Ledger  No.  1.    Close  and  rule  the  accounts  shown  there. 
Follow  the  instructions  of  your  teacher.    The  merchandise  inventory  on  April  30,  was  $837.56. 


PART  11.    BOOKKEEPING  PRACTICE 


SET  I— COAL  BUSINESS  — ONE  MONTH 

The  following  books  are  to  be  used:  Purchases  Book,  Sales  Book,  Cash  Book,  and 
Journal. 

To  the  Student.  The  transactions  in  this  set  should  be  written  up  on  journal  paper 
and  posted  on  ledger  paper  before  the  work  is  placed  in  your  regular  books.  Otherwise, 
your  work  will  probably  not  be  so  neat  as  it  should  be,  and  neatness  is  very  essential  in 
bookkeeping. 

If  you  can  not  get  journal  paper  and  ledger  paper,  for  practice  work,  rule  some  kind 
of  paper  to  correspond  with  journal  and  ledger  rulings  as  illustrated  in  this  book. 

MEMORANDA  OF  TRANSACTIONS  FOR  DECEMBER 

James  Gordon,  Proprietor,  started  in  the  coal  business  last  month  at  187  Canal  St., 
and  has  made  a  few  sales  and  purchases  to  date.  He  wishes  you  to  open  a  set  of  books  and 
has  furnished  you  the  following  information  concerning  his  affairs: 

Dec.  1.  Merchandise  on  hand  (Inventory)  $685.75;  cash  in  bank  $978.36;  accounts  due  him:  Norton 
Hotel  $120.80;  Hammond  Estate,  214  Hammond  Bldg.  $224.25;  Porter  Brothers,  118  N.  10th  St., 
$62.75.  He  owed:  Big  Muddy  Coal  Co.,  Cincinnati,  Ohio,  $532.40;  Kanawha  Coal  Co.,  Wheel- 
ing, W.  Va.,  $261.80. 

Post  the  amounts  for  the  different  accounts  in  the  opening  entries.  On  page  61  are 
instructions  concerning  the  pages  in  the  ledger  on  which  these  accounts  should  be  opened. 

Dec.    2.  Sold  Jenkins  Hardware  Co.,  84  High  St.,  10  T  Jackson  Lump  @  $6.75. 

3.  Received  check  from  Hammond  Estate  for  balance  due  Dec.  1,  $224.25. 

4.  Sold  Norton  Hotel  20  T  Pocahontas  Lump  @  $7.25,  3  T  Egg  @  $10.60. 

5.  Paid  rent  for  yard  for  December,  $100.00. 

6.  Paid  Citizens  Telephone  Co.  bill,  $6.00. 

8.  Received  bill  from  Jackson  Hill  Coal  Co.,  Columbus,  Ohio,  terms  30  da.,  $412.80,  date  of  bill 
Dec.  6. 

9.  Paid  balance  due  Kanawah  Coal  Co.,  $261.80. 

9.  Sold  Porter  Brothers  5  T  Pocahontas  Mine  Run  @  $5.50,  3  T  Nut  @  $11.00. 
10.  Received  bill  from  Kanawah  Coal  Co.  dated  Dec.  8  for  $382.80,  terms  30  days. 
10.  Sold  Hammond  Estate  10  T  Jackson  Lump  @  $6.75,  5  T  Pocahontas  Lump  @  $7.25. 
12.  Mr.  Gordon  drew  cash  $60  for  personal  use. 

5P 


60  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

I 

D?c.  13.  Sold  Montclair  Realty  Co.,  618  Lincoln  Bldg.,  10  T  Jackson  Lump  @  $6.75,  5  T  Nut  @  $11.00- 
15.  Paid  freight  on  two  shipments  of  coal,  $102.86. 

15.  Porter  Brothers  paid  balance  due  Dec.  1,  $62.75. 

16    Sold  Board  of  Education  20  T  Jackson  Lump  @  $6.75. 

16.  Cash  sales  of  coal,  $45.25. 

17.  Paid  balance  due  Big  Muddy  Coal  Co.,  Dec.  1,  $532.40. 

18.  Paid  for  printing,  stationery,  books,  etc.,  $26.85. 

19.  Sold  Jenkins  Hardware  Co.,  5  T  Jackson  Lump  @  $6.75,  2  T  Nut  @  $11.00. 

20.  Received  bill  from  Big  Muddy  Coal  Co.  for  $297.25,  terms  30  days,  dated  Dec.  18. 

22.  Received  bill  from  Johnson  &  Foley,  428  King  Bldg.,  City,  for  $428.60  for  coal,  terms  30  da. 
bill  dated  Dec.  19. 

22.  Kanawah  Coal  Co.  allowed  claim  for  shortage  covered  by  bill  received  Dec.  11.     Amount  of 
claim,  $24.80. 

23.  Porter  Brothers  paid  bill  of  Dec.  10,  $60.50. 

23.  Received  from  Hotel  Norton  $120.80,  balance  Dec.  1. 

24.  Sold  Hammond  Estate  15  T  Jackson  Lump  @  $6.75,  3  T  Egg  @  $10.50. 

25.  Paid  Edison  Go's,  bill  for  electric  light,  $3.86. 

26.  Mr.  Gordon  had  3  T  Egg  coal  @  $6.80  delivered  at  his  residence. 

27.  Paid  freight  on  shipments  bills  Dec.  20,  22,  $105.63. 

29.  Mr.  Gordon  invested  cash  $500.00. 

30.  Received  cash  from  Jenkins  Hardware  Co.  to  apply  on  account,  $75. 

31.  Allowed  Montclair  Realty  Co.  50c  per  ton  for  stowing  away  13  tons,  $6.50. 
31.  Paid  bookkeeper's  salary,  $100. 

HOW  TO  CLOSE  THE  WORK  AT  THE  END  OF  A  MONTH 

Study  the  Illustrations  on  pages  30,  33,  40,  41. 

Note.  It  is  generally  advisable  to  defer  the  closing  (in  ink)  of  the  books  of  original 
entry  until  the  trial  balance  is  obtained  and  the  correctness  of  the  entries  established. 
Therefore,  the  books  of  original  entry  should  show  pencil  footings  and  closings  until  after 
the  trial  balance  is  obtained.  However,  the  instructions  of  the  teacher  should  prevail, 
and  in  all  cases  the  program  for  closing  should  be  so  construed. 

1.  First,  total  the  Purchases  book  and  write  the  total  in  pencil,  just  below  the  last 
amount  in  ink  (be  sure  it  is  correct) ;  then,  on  the  first  blue  line  below  the  last  item  write 
in  black  ink,  "Total  Mdse.  Purchases"  with  the  total  extended  into  the  second  amount 
column.  Rule  with  single  and  double  red  lines.  Refer  to  the  illustrative  Purchases  book, 
page  30. 

2.  Total  the  Sales  book  and  write  the  total  in  pencil  just  below  the  last  items  (be 
sure  it  is  correct) ;  then  on  the  first  blue  line  below  the  last  item  write  in  black  ink,  "Total 
Mdse.  Sales"  with  the  total  extended  into  the  second  amount  column  under  the  amount 
of  the  last  sale.  Rule  with  single  and  double  red  lines.  Refer  to  the  illustrative  Sales 
book  on  page  33. 

3.  The  closing  of  the  Cash  book  is  very  similar  to  the  closing  of  the  Purchases  book. 
Total  the  column  of  cash  received  and  write  the  total  in  pencil  just  below  the  last  amount 
in  ink.  Total  the  column  of  cash  paid  and  write  the  total  in  pencil  just  below  the  last 
amount  in  ink,  then  ascertain  the  balance.  Make  sure  the  balance  is  correct  before  pro- 
ceeding further. 

On  the  first  blue  line  below  the  last  entry  on  the  "cash  received"  side  write,  in  black 
ink,  in  the  explanatory  column,  "Total  cash  received"  and  extend  the  amount  of  the 
pencil  total,  of  this  side,  into  the  second  amount  column.    Then,  on  the  first  blue  line 


SET  I— COAL  BUSINESS— ONE  MONTH  ^  61 

below  the  last  entry  on  the  "cash  paid"  side  write  in  black  ink,  in  the  explanatory  column 
"Total  cash  paid"  and  extend  the  amount  of  the  pencil  total,  of  this  side,  into  the  second 
amount  column.  On  the  next  blue  line  of  the  credit  side  write,  in  red  ink,  in  the  explanatory 
column,  "Balance"  and  extend  the  amount  of  the  balance  (in  red  ink)  into  the  second 
column,  just  under  the  total  of  cash  paid.  Then,  total  the  amount  of  cash  paid  and  the 
amount  of  the  balance  and  write  this  total  in  black  ink  on  the  next  blue  line.  On  the 
"cash  received"  side  bring  down  the  total  of  cash  received  on  the  same  line  with  the  total 
of  the  balance  and  the  cash  paid.  These  two  totals  should  always  agree  in  amount  and 
should  always  be  on  the  same  line,  only  on  opposite  sides  of  the  cash  book.  Rule  with  single 
and  double  red  lines.    Study  the  closing  of  the  illustrative  Cash  book  on  pages  40,  41. 

4.  Post  from  each  book  of  original  entry  in  the  order  in  which  they  were  ruled,  posting 
from  the  journal  last. 

The  accounts  needed  for  this  set  follow  and  the  headings  should  be  written  in  the 
ledger  in  the  order  indicated  below.  There  should  be  four  accounts  on  a  page,  spaced  as 
nearly  equally  as  possible. 

1.  Cash.  2.  Hotel  Norton.  3.  Hammond  Estate.  4.  Porter  Brothers'.  5.  Jenkins  Hardware  Co. 
6.  Montclair  Realty  Co.  7.  Board  of  Education.  8.  Mdse  Inventory.  9.  Big  Muddy  Coal  Co.  10. 
Kanawah  Coal  Co.  11.  Jackson  Hill  Coal  Co.  12.  Johnson  &  Foley.  13.  James  Gordon,  Proprietor. 
14.  Mdse  Sales.     15.  Mdse  Purchases.     16.  General  Expenses.     17.  Profit  &  Loss. 

In  a  set  of  books  already  open  the  accounts  would  be  in  the  ledger  and  only  the  neces- 
sary additional  accounts  would  be  opened.  Most  of  these  new  accounts  needed  would 
probably  be  personal  accounts  with  new  customers  or  with  new  creditors. 

When  a  set  of  books  is  opened  for  a  new  business  it  is  generally  the  custom  to  decide 
upon  the  accounts  needed,  except  personal  accounts,  before  the  books  are  opened.  As 
a  rule,  the  accounts  would  then  be  opened  in  the  ledger  so  as  to  simplify  the  work  at  the 
end  of  a  fiscal  period. 

5.  Rule  all  personal  accounts  that  balance,  according  to  the  illustrative  account  on 
page  11. 

6.  Balance,  rule,  and  bring  down  the  balance  of  the  Merchandise  Purchases  account 
and  the  Merchandise  Sales  account. 

7.  Total,  in  pencil,  all  the  remaining  accounts  in  the  ledger  and  write,  in  pencil,  the 
balance  of  each  account,  just  as  in  the  illustrative  accounts  in  the  textbook. 

8.  Your  ledger  should  now  agree  with  the  illustrative  ledger  on  pages  62,  63,  64,  65 
in  this  textbook. 


62 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


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SET  I— COAL  BUSINESS— ONE  MONTH 


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66 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


9.  Take  a  trial  balance  of  the  accounts  in  the  ledger  by  differences.  When  this  work 
is  completed  the  trial  balance  you  have  taken  should  appear  as  follows,  except  that  you 
are  to  supply  the  balance  of  each  account: 

TRIAL  BALANCE  SEPT.  30,   19— 


Cash 

H  *  k 

Hotel  Norton 

Hammond  Estate 

Jenkins  Hardware  Co. 

Montclair  Realty  Co. 

Board  of  Education 

Mdse  Inventory 

Big  Muddy  Coal  Co. 

*** 

Kanawah  Coal  Co. 

*** 

Jackson  Hill  Coal  Co. 

*** 

Johnson  &  Foley 

♦  ** 

James  Gordon,  Proprietor 

**  1= 

Mdse  Sales 

*** 

Mdse  Purchases 

*** 

General  Expenses 

*** 

*** 

*** 

HOW  TO  LOCATE  ERRORS  IN  TRIAL  BALANCES] 

1.  Total  both  sides  of  the  trial  balance,  even  though  it  is  apparently  wrong.  Be  sure 
your  totals  are  correct.    This  will  aid  you  to  determine  the  exact  amount  of  the  error. 

2.  After  the  exact  amount  of  the  error  has  been  determined,  look  in  the  ledger  and 
books  of  original  entry  for  a  balance  or  an  amount  corresponding  to  the  error.  If  no 
balance  or  amount  is  found  corresponding  to  the  error,  then  divide  the  amount  of  the 
error  by  2,  if  the  error  is  an  even  amount,  i.  e.,  if  the  last  figure  of  the  error  is  0,  2,  4,  6  or 
8.  Should  the  error  be  exactly  divisible  by  2,  there  may  be  one  account  on  the  wrong  side 
of  the  trial  balance  or  posted  to  the  wrong  side  of  the  ledger,  corresponding  to  the  result 
of  the  division. 

3.  Divide  the  amount  of  the  error  by  9.  If  the  error  should  be  divisible  by  9  without 
a  remainder,  it  may  be  that  the  error  is  caused  by  a  transposition  of  figures,  thus:  If 
$35.00  should  be  posted  as  $53.00  the  error  would  be  $18.00  which  amount  is  divisible 
by  9.  Check  the  ledger  for  a  balance,  that  if  transposed  in  the  trial  balance,  would  produce 
the  amount  of  the  error.  If  this  fails  to  locate  the  error,  then  look  in  the  books  of  original 
entry  for  an  amount  that,  if  transposed,  would  produce  the  amount  of  the  error. 

4.  Divide  the  amount  of  the  error  by  99.  If  the  error  should  be  divisible  by  99  with- 
out a  remainder,  it  may  be  a  transplacement  of  figures,  thus:  If  $18.00  should  be  posted 
as  18  cents  the  error  would  be  $17.82.  $17.82 -i-  99=  18.  First,  look  for  a  transplacement 
of  figures  from  the  ledger  to  the  trial  balance.  If  this  should  fail  to  locate  the  error,  then 
look  for  a  transplacement  of  figures  from  one  of  the  books  of  original  entry  to  the  ledger. 

5.  Should  the  error  be  Ic,  10c,  $1,  $10,  $100,  etc.,  it  is  probably  an  error  in  addition 
or  subtraction  and  should  be  located  by  carefully  re-adding  both  the  ledger  and  books  of 
original  entry,  or  by  balancing  the  ledger  accounts  again. 

A  great  deal  of  time  can  be  saved  by  using  good  judgment  while  looking  for  an  error. 
Sometimes  the  balance  of  an  account  will  be  the  same  for  two  or  three  consecutive  months; 


HOW  TO  DETERMINE  PROFIT  AND  LOSS  67 

therefore  it  is  seldom  worth  while  to  examine  such  an  account,  if  your  previous  trial  balance 
was  correct. 

Should  the  error  be  in  cents,  look  only  in  the  "cents  columns;"  or  should  the  error  be 
in  dollars,  look  only  in  the  "dollars  columns"  for  the  error.  If  the  error  should  involve 
four  figures,  say,  two  figures  in  dollars  (tens)  and  two  figures  in  cents,  do  not  look  in  columns 
where  "hundreds"  should  be  written. 

Failing  in  all  these  expedients,  there  is  but  one  thing  left  to  do:  all  the  work  for  the 
month  should  be  carefully  re-checked,  i.  e.,  re-add  all  books  of  original  entry,  re-check 
all  postings,  and  re-add  all  accounts  in  the  ledger. 

If  the  methods  outlined  here  are  followed  intelligently,  the  error  will  always  be  located, 
though  it  may  require  considerable  time  and  effort. 

6.  Checking  the  amounts.  Some  bookkeepers  use  a  check  mark  ( V )  to  show  that 
the  amount  is  correct  and  posted  correctly.  Others  use  only  a  period  (.)  for  the  same  pur- 
pose. 

The  check  mark,  whichever  one  is  used,  should  be  placed  just  to  the  right  or  left  of 
the  amount.  But,  be  systematic:  do  not  place  one  check  mark  to  the  left  of  an  amount 
and  the  next  check  mark  to  the  right  of  an  amount. 

It  is  preferable  to  use  the  period  as  it  keeps  the  books  looking  neater  and  is  just  as 
quickly  made,  by  rolling  the  pencil  between  the  thumb  and  the  first  finger. 

HOW  TO  DETERMINE  PROFIT  AND  LOSS 

At  the  end  of  certain  periods  of  time,  usually,  quarterly  (three  months),  semi-annually 
(six  months),  or  annually,  it  is  customary  to  determine  the  net  profits  or  the  net  losses  of 
a  business. 

This  is  done  by  assembling  all  the  accounts  from  the  ledger  that  show  expenses  and 
losses  and  those  accounts  that  show  profits,  into  a  form  which  is  commonly  called  the 
Profit  and  Loss  Statement.  This  form  is  frequently  known  as  the  Trading  and  Profit  and 
Loss  Statement. 

PROFIT  OR  LOSS  ON  MERCHANDISE  A  PROBLEM  IN  ARITHMETIC 

Before  proceeding  to  the  preparation  of  the  Profit  and  Loss  Statement,  certain 
arithmetical  calculations  are  necessary. 

The  trial  balance  as  taken  from  the  ledger  shows  the  net  purchases  for  December 
were  $1684.74  and  the  goods  on  hand  (Merchandise  Inventory),  when  the  books  were 
opened  on  December  1,  were  valued  at  $685.75.  The  goods  on  hand  (Merchandise  In- 
ventory) on  December  31  were  valued  at  $1796.75.  Before  the  profit  or  loss  from  the 
sale  of  merchandise  can  be  determined  it  is  necessary  to  determine  the  cost  of  goods  sold 
or  cost  of  sales.  This  is  a  simple  problem  in  arithmetic  solved  from  the  facts  just  stated, 
as  follows: 

SOLUTION 

Merchandise  Inventory  Dec.  1,  19-  $685.75 

Net  Purchases  during  Dec.  19-  1684.74 


Total  Net  Purchases  $2370.49 

Merchandise  Inventory  Dec.  31,  19-  1796.75 


Cost  of  Goods  Sold  during  Dec.  19-       .  $573.74 


68 


LYONS'  ROOKKEEPING  AND  ACCOUNTING 


It  is  evident,  that  if  all  the  merchandise  bought  by  Mr.  Gordon  cost  $2370.49  and  he 
now  has  merchandise  unsold  that  cost  $1796.75,  the  difference  must  have  been  sold.  There- 
fore, the  difference,  or  $573.74.  was  the  cost  of  goods  sold,  or  cost  of  sales. 

The  trial  balance  as  taken  from  the  ledger  shows  the  net  merchandise  sales  for  December 
amounted  to  $893.00.    This  adds  one  more  fact  to  the  problem,  and  the  solution  follows: 


SOLUTION 

Net  Merchandise  Sales  during  December  19- 
Cost  of  Merchandise  Sold  during  December  19- 

Gross  Profit  from  Merchandise  Sales 

NET  PROFIT  OR  NET  LOSS 


$831.00 
573.74 

$319.26 


Certain  expenses  were  incurred  in  making  the  sales  and  the  amount  of  these  expenses 
shown  by  the  trial  balance  as  taken  from  the  ledger  was  $236.71,  the  amount  of  the  General 
Expense  account,  which  must  be  deducted  from  the  gross  profit. 


SOLUTION 

Gross  Profit  from  Mdse.  Sales 
Expenses  incurred  during  December  19- 

Net  Profit  made  during  December  19- 


$319.26 
236.71 

$82.55 


FORM  OF  THE  PROFIT  AND  LOSS  STATEMENT 

Having  solved  the  problem  to  determine  the  net  profit  or  the  net  loss,  we  must  now 
assemble  the  facts  of  the  solution  in  the  proper  form.  The  following  is  the  form  most 
commonly  used  by  bookkeepers  and  accountants  and  is  generally  accepted  as  a  standard, 
though  it  is  sometimes  expanded  to  meet  the  conditions  of  a  particular  business: 


James  Gordon 

18  Canal  St. 

Profit  and  Loss  Statement 

For  the  month  of  December  19- 


Net  Mdse  Sales  Dec.  19- 
Mdse  Inventory  Dec.  1,  19- 
Net  Mdse  Purchases  Dec.  19- 

*** • ** 

4ii)i*i|c  .   i>i* 

Total  Net  Mdse  Purchases  Dec.  19- 
Less-Mdse  Inventory  Dec.  31,  19- 

■„  Cost  of  Goods  Sold 

***• ** 

Gross  Profit 
General  Expenses 

*** ■ ** 
*** • ** 

Net  Profit 

*** • ** 

EXERCISE  XXXIV 


Prepare  a  Profit  and  Loss  Statement,  using  the  form  £iven  above  and  supplying  the  amounts  from 
the  solution  of  the  problem  which  precedes  the  form. 


HOW  TO  DETERMINE  NET  CAPITAL  OF  PROPRIETOR  69 

HOW  TO  DETERMINE  NET  CAPITAL  OF  PROPRIETOR 

At  the  end  of  a  fiscal  period,  after  th«  net  profit  or  the  net  loss  has  been  determined, 
it  is  customary  to  determine  the  net  capital  of  the  proprietor. 

This  is  done  by  assembling  all  the  accounts  from  the  ledger,  that  represent  the  things 
owned  by  the  proprietor,  debts  due  him,  and  the  debts  that  he  owes,  into  a  form  which  is 
commonly  known  as  a  Statement  of  Assets  and  Liabihties  or  Balance  Sheet.  It  is  also 
known  as  a  Statement  of  Resources  and  Liabihties.  In  this  book,  the  term  Balance  Sheet 
will  be  used. 

WHAT  THE  PROPRIETOR  OWNS 

It  is  frequently  necessary  to  look  elsewhere  than  in  the  ledger  or  trial  balance  to  deter- 
mine the  value  of  what  the  proprietor  owns,  as  the  value  of  the  property  represented  by  the 
account  in  the  ledger  may  have  changed. 

One  of  the  accounts  representing  property  owned  by  the  proprietor  is  Merchandise 
Inventory,  but  the  value  of  merchandise  on  Dec.  31  was  $1796.75  and  not  the  amount  shown 
by  the  ledger.  Another  account  representing  something  owned  by  the  proprietor  is  Cash 
as  shown  by  both  the  cash  book  and  ledger,  which  should  agree  with  the  actual  cash  when 
counted.    The  balance  of  this  account  is  $777.51. 

WHAT  IS  DUE  THE  PROPRIETOR 

From  an  examination  of  the  trial  balance  as  taken  from  the  ledger  it  is  apparent  that 
several  persons,  firms  or  corporations  owe  the  proprietor  for  merchandise  they  purchased. 

The  amount  due  him  is  found  by  adding  the  balances  of  these  different  accounts  as 
follows: 

ACCOUNTS  RECEIVABLE 

Hotel  Norton  $176.50 

Hammond  Estate  236.50 

Jenkins  Hdw.  Co.  48.25 

Montclair  Realty  Co.  116.00 

Board  of  Education  135.00 


Total  Accounts  Receivable  $712.25 


WHAT  THE  PROPRIETOR  OWES 

From  an  examination  of  the  trial  balance  as  taken  from  the  ledger  it  is  evident  the 
proprietor  owes  certain  persons,  firms,  or  corporations  for  merchandise  purchased  and 
not  yet  paid  for. 

The  amount  he  owes  is  found  by  adding  the  amounts  due  these  various  creditors  as 
follows: 

ACCOUNTS  PAYADLE 

Big  Muddy  Coal  Co.  $297.25 

Kanawah  Coal  Co.  358.00 

Jackson  Hill  Coal  Co.  412.80 

Johnson  &  Foley  428.60 

Total  Accounts  Payable  $1496.65 


70 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


FORM  OF  THE  BALANCE  SHEET 

A  form  of  Balance  Sheet  very  commonly  used  follows,  though  this  is  frequently  ex- 
panded to  meet  the  demands  of  a  particular  business. 

James  Gordon 

18  Canal  St. 

Balance  Sheet 

As  at  close  of  business  December  31,  19- 


Assets 
Cash 

Accounts  Receivable 
Mdse  Inventory 

♦*♦ ■ ♦* 
*** • ** 

Total  Assets 

Liabilities  and  Capital 
Accounts  Payable 

Net  Capital — James  Gordon  Proprietor 

****• ** 

EXERCISE  XXXV 

From  the  calculations  just  made  showing  what  the  proprietor  owns,  what  is  due  him,  and  what  he 
owes,  prepare  a  Balance  Sheet  in  the  form  shown  here  and  supply  the  amounts  for  each  heading. 

TO  PROVE  THE  NET  PROFIT  OR  NET  LOSS 

After  determining  the  net  profit  or  net  loss  and  the  net  capital  of  the  proprietor  the 
results  shown  by  the  two  statements  should  agree.  In  the  chapter  on  proprietor's  accounts 
it  was  stated  that  the  net  investment  plus  the  net  profit  or  minus  the  net  loss  equaled  the 
net  capital. 

Therefore,  in  order  to  prove  the  accuracy  of  the  Profit  and  Loss  Statement  and  the 
Balance  Sheet,  a  proof  sheet  is  made  from  the  following  facts : 


Net  Investment  of  James  Gordon  Dec.  31,  19- 
Net  Profit  for  December 

Net  Capital  of  James  Gordon  Dec.  31,  19- 


$1707.31 
82.55 

$1789.86 


EXERCISE  XXXVI 


Prepare  a  proof  sheet  like  the  illustration  and  supply  the  amounts,  for  the  headings,  from  the  informa- 
tion given  above. 


FORM  OF  PROOF  SHEET 

Proof  Sheet 


James  Gordon  Net  Invest  Dec.  31,  19- 
James  Gordon  Net  Profit  for  Dec.  19- 

James  Gordon  Net  Capital 


*4i:tiic  •   4i« 


HOW  TO  DETERMINE  NET  CAPITAL  OF  PROPRIETOR 


71 


The  proof  sheet  is  sometimes  appended  to  the  Balance  Sheet  or  it  is  made  as  a  separate 
sheet.  It  is  frequently  desirable  to  make  it  a  separate  sheet,  when  there  are  partners.  It 
should  not  be  shown,  as  a  rule,  when  preparing  a  balance  sheet  for  a  bank  or  for  credit 
purposes.  The  proof  sheet  should  be  regarded  only  as  a  working  paper  for  the  use  of  the 
bookkeeper  and  the  proprietor,  or  the  proprietors. 


CLOSING  THE  LEDGER 

Thus  far  you  have  prepared  a  Profit  and  Loss  Statement  and  a  Balance  Sheet. 
The  next  step  is  to  close  the  ledger  so  that  the  results  shown  by  the  Profit  and  Loss 
Statement  may  be  recorded  in  the  books. 

The  recording  of  these  results  begins  with  a  series  of  journal  entries,  as  outlined  on 
pages  55,  56,  57,  known  as  closing  journal  entries,  and  is  completed  by  ruhng  the  accounts 
affected  after  posting  the  entries. 

EXERCISE  XXXVII 

The  closing  journal  entries  for  this  set  of  books  follow,  but  the  amounts  of  the  entries 
are  omitted.  You  should  copy  the  entries  and  supply  the  proper  amounts  by  referring 
to  the  trial  balance  and  to  the  Profit  and  Loss  Statement.  Notice  that  the  entries  follow 
in  the  same  order  that  the  accounts  appear  on  the  Profit  and  Loss  Statement. 


Dec.  31 

Merchandise  Purchases 
Merchandise  Inventory 
To  transfer  the  inventory  of  Dec.  1  to  the 
Purchases  account. 

*** 

*** 

•  ♦• 

Dec.  31 

Merchandise  Inventory 
Merchandise  Purchases 
To  record  the  inventory  of  Dec.  31. 

*** 

*** 

** 

Dec.  31 

Merchandise  Sales 
Merchandise  Purchases 

To  close  the  latter  account  and  transfer  cost  of 
sales  to  Merchandise  Sales  account. 

*** 

*** 

** 

Dec.  31 

Merchandise  Sales                                            • 
Profit  &  Loss 

To  close  the  former  account  and  transfer  gross 
profit  to  P.  &  L.  account. 

*** 

*** 

** 

Dec.  31 

Profit  &  Loss 
General  Expense 

To  close  the  latter  account  and  transfer  the  Gen. 
Exp.  to  the  P.  &  L.  account. 

***• 

♦  **• 

** 

Dec.  31 

Profit  &  Loss 
James  Gordon  Proprietor 

To  close  the  former  account  and  transfer  the  net 
profit  to  the  proprietor's  account. 

♦  «• 

*• 

The  following  accounts  are  now  closed  and  should  be  ruled  hke  the  illustrations  on 
pages  55,  56,  57:  Merchandise  Purchases,  Merchandise  Sales,  Profit  &  Loss,  and  General 
Expense. 


72 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


Merchandise  Inventory  account  now  shows  three  amounts.  The  first  debit  amount 
and  the  one  credit  amount  balance,  and  the  account  should  be  ruled  with  a  single  red 
line  through  the  amount  columns  only,  thus  leav'ng  that  account  showing  the  amount 
of  the  inventory  on  December  31. 

The  proprietor's  account  should  be  balanced,  ruled  and  the  balance  brought  down 
as  explained  on  page  14. 

Take  a  trial  balance  of  the  remaining  open  accounts  in  your  ledger.  This  is  called 
a  trial  balance  after  closing,  or  a  test  trial  balance.  It  is  taken  for  the  purpose  of  knowing 
whether  the  books  are  in  balance  before  proceeding  with  the  entries  for  the  next  month. 


QUESTIONS  ON  CLOSING  THE  LEDGER 

1.  Compare  the  accounts  in  the  trial  balance,  after  closing,  with  the  accounts  in  the  Balance  Sheet. 
2.  Compare  the  accounts  closed  with  the  Profit  and  Loss  Statement.  3.  Compare  the  amounts  of  the 
Merchandise  Purchases  and  Merchandise  Sales  items  in  the  Profit  and  Loss  Statement  with  the  amounts 
of  the  same  accounts  in  the  ledger.  4.  How  many  accounts  on  the  trial  balance  are  not  found  in  either 
the  Profit  and  Loss  Statement  or  the  Balance  Sheet?  5.  Why  is  a  list  made  of  the  accounts  receivable 
and  entered  as  one  amount  on  the  Balance  Sheet?  6.  Why  are  the  accounts  payable  entered  as  one  amount 
on  the  Balance  Sheet?  7.  How  do  you  account  for  the  use  of  two  different  amounts  in  the  Merchandise 
Inventory  account?  8.  Under  what  circumstances  might  there  be  no  inventory  at  the  closing  period? 
9.  What  might  cause  the  Balance  Sheet  to  appear  without  this  item:  "Accounts  Payable"?  10.  What 
might  cause  the  Balance  Sheet  to  appear  without  accounts  receivable?  11.  Do  you  know  of  any  kind  of 
business  that  would  have  no  accounts  receivable? 

Note.  To  provide  additional  drill  in  making  journal  entries  and  to  secure  rapidity 
of  thought  on  the  part  of  the  student,  it  is  here  suggested  that  the  transactions  covered 
by  this  set  be  orally  journahzed  in  class.  A  good  plan  is  to  have  the  student  rise  in  class, 
read  the  transaction,  and  then  make  the  required  journal  entry.  Journalizing  these  trans- 
actions in  this  manner,  should  require  not  more  than  20  minutes. 

From  each  of  the  following  trial  balances  prepare  a  Profit  and  Loss  Statement,  a 
Balance  Sheet,  and  the  closing  journal  entries  necessary  to  record  the  results  shown  by 
the  Profit  and  Loss  Statement: 

EXERQISE  XXXVIII 

Trial  Balance  Dec.  31,  19- 


Cash 

847.93 

City  Pattern  Shop 

476.83 

Douglas  &  Lomason 

102.76 

Lee  &  Cady 

86.92 

Herrick  Brothers 

184.39 

Mdse  Inventory 

1783.44 

National  Tea  Co. 

148.92 

American  Radiator  Co. 

243.38 

J.  W.  Garland  Proprietor 

2682.37 

Mdse  Purchases 

3114.77 

General  Expense 

284.93 

Mdse  Sales 

3807.30 

6881.97 

6881.97 

Mdse  Inventory  Dec.  31,  19- 


$1638.46 


HOW  TO  DETERMINE  NET  CAPITAL  OF  PROPRIETOR 

EXERCISE  XXXIX 

Trial  Balance  Mar.  31,  19- 


73 


Cash 

3879.62 

'. — ^ — -  -  ....  ,— — 

Ohio  Dairy  Co. 

385.78 

National  Forge  Co. 

576.18 

Tuttle  &  Clark 

187.90 

Mdse  Inventory 

14784.68 

David  C.  Beggs  Co. 

837.29 

National  Twist  Drill  Co. 

386.45 

Grennen  &  Borden 

183.11 

L.  W.  Bowen,  Proprietor 

21821.49 

Mdse  Purchases 

32311.72 

General  Expense 

4296.81 

Mdse  Sales 

33194.35 

56422.69 

56422.69 

Mdse.  Inventory  Mar.  31,  19- 


$19386.47 


EXERCISE  XL 

Trial  Balance  June  30,  19- 


Cash 

1498.48 

F.  G.  Clayton  &  Co. 

486.12 

C.  W.  Burroughs 

112.83 

F.  M.  Berkley 

73.21 

Culbertson  &  Kelly 

281.17 

Mdse  Inventory 

8546.87 

Wolverine  Saw  Co. 

386.42 

Glass,  Cook  &  Atkinson 

298.73 

D.  J.  Cooper,  Proprietor 

12984.17 

Mdse  Purchases 

7463.84 

General  Expense 

1876.94 

Mdse  Sales 

6670.14 

20339.46 

20339.46 

Mdse.  Inventory  June  30,  19- 


$10238.12 


SET  II  —  FRUIT  AND  PRODUCE  BUSINESS  —  TWO  MONTHS 

Continuing  the  use  of:    Purchases  Book,  Sales  Book,  Cash  Book,  and  Journal. 
Terms  of  30  days  from  date  of  bill  are  allowed  on  all  credit  sales. 

CLASSIFYING  ACCOUNTS  IN  THE  LEDGER 

It  is  advisable  to  classify  the  accounts  where  a  new  ledger  is  being  opened  as  it  saves 
time,  at  the  end  of  a  fiscal  period,  in  the  preparation  of  the  Profit  and  Loss  Statement 
and  the  Balance  Sheet. 

In  this  set  the  accounts  that  make  up  the  Balance  Sheet  will  appear  before  the  accounts 
that  make  up  the  Profit  and  Loss  Statement. 


74  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

ORDER  OF  ACCOUNTS  IN  THE  LEDGER 

Open  the  first  account  for  September  work  on  page  7,  in  the  order  following,  and  allow 
the  amount  of  space  indicated:  Cash  J^  page,  customers  accounts,  as  they  occur  in  the 
entries,  ^  page  each.  Merchandise  Inventory  (page  11)  H  page,  follow  on  page  11  with 
accounts  payable  as  they  occur  in  the  entries,  allowing  3^  page  for  each  account.  Charles 
Bowlus,  Proprietor  (page  14)  1  page,  Merchandise  Sales  (page  15)  3^  page,  follow  with 
Merchandise  Purchases  ]/2  page.  General  Expense  (page  16)  1  page.  Profit  &  Loss  (page 
17)  1  page. 

MEMORANDA  OF  TRANSACTIONS  FOR  SEPTEMBER 

Sep.  1.  Charles  Bowlus  began  a  wholesale  fruit  and  produce  business  at  386  Front  St ,  the  early  part  of 
August  and  now  desires  to  open  a  set  of  books.  He  furnished  the  following  information  concern- 
ing his  assets  and  liabilities:  Merchandise  Inventory  $432.76;  Cash  $1286.42;  accounts  due  him: 
Central  Market  Co.  $130.48;  Judson  Restaurant  $62.74;  He  owed,  Central  Fruit  Auction  Co. 
$121.80.    Prepare  opening  entries  from  the  above  information. 

1.  Paid  rent  of  store  for  Sep.,  $45.00. 

2.  Received  a  bill  from  Central  Fruit  Auction  Co.,  Chicago,  111.,  dated  Aug.  31,  terms  60  day;  amount 
of  bill  $136.87. 

2.  Paid  for  stationery  and  books  $22.65. 

2.  Paid  for  postage  stamps  $2.00. 

3.  Received  a  bill  from  Fruit  Growers  Exchange,  St.  Louis,  Mo.,  dated  Sep.  1,  terms  30  da.    Amount 
of  bill  $89.36. 

3.  Sold  Central  Market  Co.,  85  Broadway,  15  bu.  Elberta  Peaches  @,  $3.50. 

3.  Sold  Judson  Restaurant,  24  W.  Main  St.,  Terms  30  da.,  1  ct  Cabbage  @  $2.50,  1  bu  Elberta 
Peaches  @  $3.75. 

5.  Received  from  Fruit  Growers  Exchange  a  credit  memorandum  for  1  bunch  of  Bananas  that  were 
worthless.    Amount  $1.85. 

6.  Paid  to  bookkeeper  $15.00  for  week. 
6.  Mr.  Bowlus  withdrew  $25.00. 

8.  Sold  John  Blake  &  Co.,  283  E.  High  St.,  2  bx  Red  Peppers  @  $.85,  4  bu  Early  Ohio  Potatoes 
@  $1.80,  20  ct  Damson  Plums  @  $2.30. 

8.  Central  Market  Co.  paid  balance  of  their  account  on  Sep.  1,  $130.48. 

9.  Paid  balance  due  Central  Fruit  Auction  Co.  on  Sep.  1,  $121.80. 

9.  Paid  bill  of  Fruit  Growers  Exchange  less  the  amount  of  returned  goods  on  5th,  $87.51. 
10.  Received  bill  from  John  Amidon  Co.,  185  River  St.,  dated  Sept.  8.     Amount  of  bill  $216.13, 
terms  30  da. 

10.  Sold  Story  Lunch  Co.,  146  Jefferson  Ave.,  2  bu  Onions  @  $1.55,  6  bx  Michigan  Celery  @  $.78, 
3  bu  Apples  @  $1.65. 

11.  Sold  for  cash  2  bu  Elberta  Peaches  @  $4.00. 

11.  Allowed  Story  Lunch  Co.  a  rebate  of  15c  per  box  for  the  celery  purchased  yesterday  on  account 
of  poor  quality.    Total  rebate  $.90. 

11.  Sold  Alkire  Grocery  Co.,  152  Broadway,  2  ct  Cabbage  @  $2.50,  5  bx  Michigan  Celery  @  $.75, 
2  bunches  Bananas  @  $2.10,  10  bu  Early  Ohio  Potatoes  @  $1.75. 

12.  There  was  a  shortage  in  bill  of  John  Amidon  Co.  of  1  bu  Elberta  Peaches  @  $2.55,  1  bx  Michigan 
Celery  @  $.60. 

12.  Received  check  from  Judson  Restaurant  for  balance  of  account  on  Sep.  1. 

13.  Paid  bookkeeper  for  week  $15.00;  Mr.  Bowlus  withdrew  $25.00. 

15.  Received  from  Central  Fruit  Auction  Co.  bill  for  $47.53,  dated  Sep.  12,  terms  30  da. 

15.  Received  from  Fruit  Growers  Exchange  bill  for  $92.85,  dated  Sep.  13,  terms  30  da. 

16.  Received  from  Southern  Fruit  Co.,  New  Orleans,  La.,  bill  for  $106.47,  dated  Sep.  14,  terms  30  da. 

16.  Sold  John  Blake  &  Co.  5  bu  Early  Ohio  Potatoes  @  $1.80,  2  bu  Onions  @  $1.65,  3  ct  Damson 
Plums  @  $2.30. 

17.  Sold  Central  Market  Co.  15  bu  Apples  @  $1.60, 15  bx  Michigan  Celery  @  $.80,  30  bx  Red  Peppers 
@  $.85. 


SET  II— FRUIT  AND  PRODUCE  BUSINESS— TWO  MONTHS  75 

To  forward  the  total  of  the  Sales  Book.  When  nearing  the  bottom  of  a  page  in  the 
sales  book,  determine  if  there  is  sufficient  space  for  the  next  entry  on  that  page  before 
beginning  to  make  the  entry.  If  there  is  not  sufficient  space  for  the  entry,  the  sales  book 
should  be  totaled  and  ruled  in  the  same  manner  as  at  the  end  of  a  month. 

But  instead  of  writing  "Total  Sales"  write  "Forwarded"  in  the  explanatory  column 
on  the  same  fine  with  the  total.  Then,  at  the  top  of  the  next  page,  on  the  first  blue  line, 
in  the  explanatory  column,  write  "Brot  forward"  and  extend  the  total  of  the  previous 
page  into  the  second  amount  column. 

Begin  the  next  entry  on  the  next  blue  line  and  proceed  the  same  as  on  the  preceding 
page.  When  the  second  page  is  totaled,  the  amount  brought  forward  should  be  included 
in  the  footing. 

Sep.  17.  Paid  express  charges  on  goods  from  Southern  Fruit  Co.    Amount,  $5.68. 
18.  Paid  cartage  on  goods  from  Southern  Fruit  Co.,  $3.00. 

18.  Sold  Peter  Cella,  132  N.  Market  St.,  5  bu  Early  Ohio  Potatoes  @  $1.85,  5  bunches  Bananas  $2.20, 
6  bu  Apples  $1.80. 

19.  Sold  Hill  Brothers,  240  Maple  St.,  2  ct  Damson  Plums  @  $2.40,  3  bx  Michigan  Celery  @  $.80. 

19.  Sold  Judson  Restaurant  3  bx  Michigan  Celery  @  $.85,  2  ct  Cabbage  @  $2.40. 

20.  Received  cash  from  Story  Lunch  Co.  for  biU  of  10th  less  rebate  on  11th,  $11.83. 
20.  Paid  bookkeeper  for  week  $15.00. 

20.  Mr.  Bowlus  withdrew  $25.00. 

22.  Received  check  from  Alkire  Grocery  for  bill  of  11th. 

22.  Sold  Alkire  Grocery  15  bu  Early  Ohio  Potatoes  @  $1.70,  10  bx  Michigan  Celery  @  $.85,  2  ct 
Onions  @  $3.20. 

23.  Sold  Peter  Cella  3  ct  Cabbage  @  $2.60,  4  bx  Green  Peppers  @  $.45. 

23.  Paid  General  Ice  Dehvery  Co.  bill  to  9/ 15,  $3.50. 

24.  Sold  Central  Market  Co.  20  bu  Apples  $1.60,  40  bx  Michigan  Celery  @  $.75,  30  bunches  Banana,s 
@  $2.30, 20  bx  Green  Peppers  @  $.35. 

24.  Sold  Judson  Restaurant  2  bu  Apples  @  $1.70. 

25.  Paid  Southern  Fruit  Co.  bill  received  9/ 16. 

26.  Received  bill  from  Fruit  Growers  Exchange  for  $76.84,  dated  Sep.  23,  terms  30  da. 

27.  Received  cash  from  John  Blake  &  Co.  for  bill  of  Sep.  8,  $54.90. 
27.  Paid  bookkeeper  $15.00. 

27.  Mr.  Bowlus  withdrew  $25.00. 

28.  Received  from  Peter  Cella  on  account  $35.00. 

28.  Mr.  Bowlus  took  for  his  personal  use,  1  bu  Apples  @  $1.10,  2  bu  Early  Ohio  Potatoes  $1.20. 

29.  Received  cash  from  Hill  Brothers  for  bill  Sep.  19,  $7.20. 

The  inventory  of  unsold  merchandise  was  $891.62. 

PROGRAM  FOR  CLOSING  SEPTEMBER  WORK 

1.  Post  and  take  a  trial  balance. 

2.  Close  and  rule  the  special  books  of  original  entry. 

3.  Prepare  a  Profit  and  Loss  Statement. 

4.  Prepare  a  Balance  Sheet, 

5.  Make  the  necessary  closing  journal  entries  and  post  them. 

6.  Rule  the  ledger. 

7.  Take  a  trial  balance  after  closing. 


76  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

SET  II  — CONTINUED 

The  entries  for  October  transactions  should  be  posted  to  the  accounts  that  were  used 
during  September,  except  the  new  accounts  which  are  opened  as  follows:  Customers' 
accounts,  3^  page  for  each  account  following  the  customers'  accounts  for  September; 
accounts  payable,  3^  page  for  each  account  following  accounts  payable  for  September; 
William  Thornton,  Partner  (page  14). 

The  same  books  of  original  entry  that  were  used  for  September  transactions  will  be 
continued  for  the  transactions  during  October. 

OPENING  AN  ACCOUNT 

Writing  the  name  of  an  account  in  the  ledger  preparatory  to  posting  charges  and 
credits  to  the  account  is  called  opening  an  account. 

When  a  new  customer  wishes  to  buy  goods  on  credit  and  his  financial  responsibility 
is  not  known,  it  is  the  custom  to  make  inquiries  concerning  him. 

These  inquiries  are  usually  made  of  business  houses  of  which  he  has  previously  bought 
goods  on  credit,  or  at  some  bank  where  he  has  an  account.  If  it  should  appear  that  he  is 
accustomed  to  pay  his  bills  promptly,  he  is  allowed  to  purchase  goods  "on  time"  or  "to 
open  an  account." 

Frequently,  large  business  houses  employ  one  person  whose  duty  it  is  to  make  inquiries 
concerning  prospective  customers  and  to  decide  upon  questions  of  credit.  This  person  is 
generally  called  the  credit  manager. 

Where  there  is  a  credit  manager  no  account  with  a  customer  should  be  opened  until 
the  credit  manager  has  authorized  it. 

In  smaller  business  houses  the  proprietor,  manager,  secretary,  or  perhaps  the  book- 
keeper, is  credit  manager. 

MEMORANDA  OF  TRANSACTION  FOR  OCTOBER 

Oct.  1.  Charles  Bowlus  desires  to  bring  more  capital  into  his  business  and  has  admitted,  as  a  partner, 
William  Thornton  who  is  to  invest  cash  equal  to  the  net  capital  of  Charles  Bowlus  on  October  1,  19-. 
Make  an  entry  for  the  investment  of  William  Thornton,  Partner,  for  $1728.21. 

Note  The  partnership  will  be  known  as  Charles  Bowlus  &  Company.  The  agreement  is  that  William 
Thornton  is  to  take  no  active  part  in  the  management  of  the  company,  that  Charles  Bowlus  is  to  be 
manager  at  a  salary  of  $35.00  per  week,  and  is  to  make  a  Profit  and  Loss  Statement  and  a  Balance 
Sheet  at  the  end  of  each  month. 

Oct.  1.  Make  an  adjusting  entry  to  dose  the  account  of  Charles  Bowlus,  Proprietor,  and  open  an  account 
for  Charles  Bowlus,  Partner. 

1.  Paid  rent  for  October,  $45.00. 

2.  Paid  balance  due  John  Amidon  &  Co.  Oct.  1. 

2.  Received  of  John  Blake  &  Co.  balance  due  on  their  account  Oct.  1. 

3.  Sold  Gilsey  Hotel,  54  Congress  St.,  6  bu  Elberta  Peaches  @  $3.50,  20  bu  Early  Ohio  Potatoes 
@  $1.65. 

3.  Received  bill  from  Conroy  &  Jacobs,  Kalamazoo,  Mich.,  terms  30  da.,  for  $106.47,  date  of  bill 
Oct.  1. 

4.  Received  check  from  Central  Market  Co.  for  $114.00  on  account. 

4.  Sold  Hartman's  Fruit  Market,  518  Broadway,  20  ct  Cabbage  @  $2.45,  15  bu  Apples  @  $1  65. 
6.  Cash  sales  of  merchandise,  $42.60. 

5.  Paid  telephone  bill,  $6.00. 

6.  Paid  for  electric  light,  $2.68;  Paid  salaries,  $72.00. 
6.  Paid  Central  Fruit  Auction  Go's,  bill  of  Aug.  31. 


SET  II— FRUIT  AND  PRODUCE  BUSINESS— TWO  MONTHS  77 

#ct.     8.  Sold  Hill  Brothers,  5  bx  Red  Peppers  @  80c,  10  bx  Michigan  Celery  @  76c,  4  b  Bananas  @  $2.15. 

8.  Sold  Alkire  Grocery^  Co.,  14  bu  Early  Ohio  Potatoes  @  $1.90,  12  bu  Apples  @  $1.70. 

9.  Received  bill  from  Central  Fruit  Auction  Co.  for  $85.73,  terms  30  da.,  date  of  bill  Oct.  8. 
9.  Received  bill  from  Fruit  Growers  Exchange  for  $108.39,  terms  30  da.,  date  of  bill  Oct.  7. 

10.  Paid  Fruit  Growers  Exchange  $92.85. 

10.  Sold  John  Blake  &  Co.,  20  bx  Michigan  Celery  @  78c,  10  bu  Apples  @  $1.80. 

11.  Received  from  Judson  Restaurant  $13  60  on  account 

11.  Sold  Story  Lunch  Co.,  2  b  Bananas  @.  $2.45,  3  bu  Applies  @  $1.70,  4  bx  Michigan  Celery  ©  85c. 

12.  Received  credit  memorandum  from  Conroy  &  Jacobs  for  $6.60,  allowance  of  6c  per  box  on  110  bx 
celery. 

12.  Paid  express  on  goods  received  from  Fruit  Growers  Exchange  as  per  bill  of  Oct.  7,  $12.70. 

13.  Paid  salaries,  $72.00. 

13.  Received  cash  from  Central  Market  Co.,  $138.00. 
15.  Paid  for  painting  sign  on  store  front  $18.40. 

15.  Received  bill  from  Central  Fruit  Auction  Co.,  terms  30  da.,  for  $123.18,  dated  Oct.  13. 

16.  Sold  Central  Market  Co.,  20  ct  Cabbage  @  $2.45,  40  bx  Michigan  Celery  @  85c,  10  bx  Red 
Peppers  @  80c. 

16.  Mr.  Bowlus  took  for  his  personal  use  2  bu  Apples  @  $1.10.  1  bx  Michigan  Celery  @  $.60. 

17.  Sold  Gilsey  Hotel  10  bu  Apples  @  $1.60,  15  bx  Michigan  Celery  @  90c,  3  ct  Cabbage  @  $2.45. 

17.  Received  check  from  Peter  Cella  for  $9.60. 

18.  Cash  sales  of  merchandise,  $31.68. 

18.  Allowed  Central  Market  Co.  credit  of  6c  per  crate  for  40  crates  Celery  sold  to  them  on  16th. 

19.  Received  bill  from  Conroy  &  Jacobs  for  $94.83,  terms  30  da.,  dated  Oct.  16. 

19.  Sold  Peter  Cella  15  bu  Apples  @  $1.70,  7  ct  Cabbage  @  $2.35. 

20.  Paid  salaries,  $72.00;  Paid  Central  Fruit  Auction  Co.  $47.53. 
22.  Received  check  from  Alkire  Grocery  Co.,  $40.40. 

22.  Paid  Fruit  Growers  Exchange  $76.84. 

23.  Received  bill  from  John  Amidon  &  Co.  for  $186.92,  terms  30  da.,  dated  Oct.  20. 

23.  Received  bill  from  Southern  Fruit  Co.  for  $204.98,  terms  30  da.,  dated  Oct.  19. 

24.  Sold  Central  Market  Co.  5  bx  Lemons  @  $6.45,  8  bx  Oranges  @  $6.50. 

24.  Sold  Judson  Restaurant,  2  bu  Apples  @  $1.80,  3  b  Bananas  @  $2.90. 

25.  Paid  express  on  goods  from  Southern  Fruit  Co.,  $31.68. 

25.  Sold  Alkire  Grocery  Co.,  5  bx  Oranges  @  $6.50,  12  bu  Apples  ®  $2.10. 

26.  Sold  Hartman  Fruit  Market,  10  bx  Oranges  @  $6.15, 10  bx  Lemons  @  $6.95, 15  bu  Apples  @>  $2.0.') 

26.  William  Thornton,  Partner,  took  4  bu  Apples  @  $1.45. 

27.  Paid  salaries,  $72.00;  Cash  sales,  $51.18. 

29.  Received  check  from  Judson  Restaurant,  $3.40 

29.  Received  bill  fom  Fruit  Growers  Exchange  for  $74.83,  terms  30  da.,  dated  Oct.  27. 

30.  Allowed  Hartman  Fruit  Market  a  rebate  of  $2.50  on  Lemons  bought  on  Oct.  26. 

30.  Received  cash  from  John  Blake  &  Co.,  $25.00. 

31.  Sold  Judson  Restaurant  2  ct  Cabbage  @  $2.65,  4  bu  Apples  @  $2.15,  2  bx  Oranges  @  $6.25. 
31.  Received  from  Gilsey  Hotel  $54.00. 

31.  Sold  Central  Market  Co.  20  bu  Apples  @  $2.10,  15  bx  Oranges  @  $6.35. 
31.  Received  bill  from  John  Amidon  &  Co.  for  $71.34,  terms  30  da.,  dated  Oct.  28. 
31.  Sold  Hill  Brothers  20  bu  Apples  @  $2.15,  6  bx  Oranges  @  $6.45,  5  ct  Cabbage  @  $2.45. 
31.  Sold  Broadway  Market,  20  Broadway,  20  bx  Oranges  @  $6.35,  25  bu  Apples  @  $2.15. 
The  inventory  of  unsold  merchandise  amounted  to  $1158.32. 

PROGRAM  FOR  CLOSING 

1.  Post  and  take  a  trial  balance. 

2.  Close  and  rule  the  special  books  of  original  entry. 

3.  Prepare  a  Profit  and  Loss  Statement. 

4.  Prepare  a  Balance  Sheet. 


78  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

6.  Make  the  necessary  closing  journal  entries  and  post  them. 

6.  Rule  the  ledger. 

7.  Take  a  trial  balance  after  closing. 

Note  To  provide  additional  drill  in  making  journal  entries  and  to  secure  rapidity  of  thought  on  the  part 
of  the  student,  it  is  here  suggested  that  the  transactions  covered  by  this  set  be  orally  journalized 
in  class.     This  work  should  not  require  more  than  30  minutes. 


STATISTICAL  INFORMATION 

The  books  of  any  business,  when  properly  kept,  should  give  the  proprietor  or  manager 
of  the  business  information  that  is  valuable  in  planning  for  its  future  operation. 

Many  things  not  shown  on  the  Profit  and  Loss  Statement  or  on  the  Balance  Sheet 
for  a  single  fiscal  period  can  be  determined  by  comparing  the  Profit  and  Loss  Statements 
and  the  Balance  Sheets  for  two  or  more  successive  fiscal  periods. 

A  comparison  of  two  Profit  and  Loss  Statements  will  show  readily  any  increase 
or  decrease  in  sales,  expenses,  gross  profits,  etc.  Likewise,  a  comparison  of  two  Balance 
Sheets  will  show  any  increase  or  decrease  in  assets,  liabilities,  and  capital. 

COMPARATIVE  STATEMENT 

The  practice  of  making  comparative  statements  is  increasing  until  now  almost  every 
business  house  uses  them,  whereas  in  former  years  it  was  the  custom  only  of  railroads  and 
other  large  corporations. 

The  following  form  illustrates  the  use  of  comparative  statements  for  the  two  months 
of  business  just  completed: 

EXERCISE  L 

Prepare  a  form  on  journal  paper  (or  other  paper)  like  the  illustration,  and  from  the  Profit  and  Loss 
Statement  for  September  and  the  one  for  October  supply  the  necessary  amounts.  Extend  the  increase 
or  decrease  of  the  balances  for  October,  into  the  proper  column. 


Charles  Bowlus  &  Company 
Comparative  Profit  &  Loss  Statement 


19- 

19- 

/ 

September 

October 

Increase 

Decrease 

Net  Sales 
Cost  of  Sales 
Gross  Profit  on  Sales 
General  Expenses 
Net  Profit 

EXERCISE  LI 

Prepare  a  form  on  journal  paper  (or  other  paper)  like  the  illustration,  and  from  the  Balance  Sheet 
for  September  and  the  one  for  October  supply  the  necessary  amounts.  Extend  the  increase  or  decrease 
of  the  balances  for  October,  into  the  proper  column. 


STATISTICAL  INFORMATION 


79 


Charles  BowlUs  &  Company 
Comparative  Balance  Sheet 


19- 

19- 

Assets 
Cash 

Accounts  Receivable 
Mdse  Inventory- 
Total  Assets 

Sept  ember 

October 

Increase 

Decrease 

Liabilities 
Accounts  Payable 

Capital 
Charles  Bowlus,  Proprietor 

In  preparing  comparative  statements,  if  only  one  column  is  used  for  both  increases 
and  decreases,  the  increases  should  be  written  in  black  ink  and  the  decreases  should  be 
written  in  red  ink,  or  vice  versa. 

The  increase  and  decrease  column  of  the  Comparative  Balance  Sheet  may  be  used 
as  a  further  proof  of  the  accuracy  of  the  results  as  shown  by  the  Profit  and  Loss  Statements 
and  the  Balance  Sheets. 

EXERCISE  LII 

From  information  given  on  the  Comparative  Balance  Sheet,  the  Comparative  Profit  and  Loss  State- 
ment, and  the  ledger,  supply  the  amounts  for  the  following  form.  Use  journal  paper  or  rule  some  kind  of 
paper  to  correspond  with  journal  ruUngs. 


Summary  of  Distribution  of  Profits 


Net  Increase  in  Capital 

Less:  William  Thornton's  Investment  Oct.  1 

Net  Increase  in  Capital  due  to  profits 
Add:  Withdrawals  by :  Charles  Bowlus 

WiUiam  Thorton 
Net  Profit  for  the  Fiscal  Period 


QUESTIONS  ON  THE  COMPARATIVE  STATEMENT  AND  BALANCE  SHEET 

1.  What  per  cent  did  the  net  sales  for  October  increase  over  the  net  sales  for  September?  2.  The 
gross  profit  on  net  sales  for  October  was  what  per  cent  greater  than  the  net  sales  for  September?  3.  The 
gross  profit  on  net  sales  for  October  was  what  per  cent  of  the  net  sales  for  October?  4.  The  gross  profit 
on  net  sales  for  September  was  what  per  cent  of  the  net  sales  for  September?  5.  What  was  the  per  cent 
of  increase  in  the  general  expenses  for  October,  over  September?  6.  The  general  expenses  for  September 
were  what  per  cent  of  the  net  sales  for  September?  7.  The  general  expenses  for  October  were  what  per 
cent  of  the  net  sales  for  October?  8.  The  net  profit  for  September  was  what  per  cent  of  the  net  sales  for 
September?  9.  The  net  profit  for  October  was  what  per  cent  of  the  net  sales  for  October?  10.  The  net 
profit  for  September  was  what  per  cent  on  the  net  capital?  11.  The  net  profit  for  October  was  what  per 
cent  of  the  net  capital  for  October?  12.  How  would  you  account  for  the  unusual  increase  in  the  net  capital 
at  the  end  of  October,  over  that  at  the  end  of  September? 


go  LYONS'  BOOKKEEPING  AND  ACCOtTNTiNO 

TEST  EXERCISE  LIII 

Enter  the  following  transactions,  post,  and  take  a  trial  balance.    Use  the  following 
books  of  original  entry:   journal,  cash  book,  sales  book,  and  purchases  book. 

Time  for  This  Work,  J^5  Minutes 

May     1.  James  Clark  invested  cash  $7500.00. 

2.  Bought  merchandise  of  Strong,  Carhsle  &  Hammond,  $2150.25,  terms  30  days, 

3.  Sold  Kelsey  Wheel  Co.  merchandise  amounting  to  $838.75,  terms  30  days. 

4.  Sold  Hays  Manufactuing  Co.  merchandise  amovmting  to  $486.15,  terms  30  days 

5.  Paid  rent,  $125.00. 

6.  Paid  salaries  for  one  week,  $75.00. 

8.  Sold  Oilman  &  Bates  merchandise  amounting  to  $384.60,  terms  30  days. 

9.  Bought  goods  of  Beecher,  Peck  &  Lewis,  amount  of  bill  $1538.00,  terms  30  days. 

10.  Received  check  from  Kelsey  Wheel  Co.  for  $500.00. 

11.  Paid  freight  bills  to  date  on  goods  purchased,  $83.16. 

12.  Paid  salaries  for  one  week,  $75.00. 

14.  Strong,  Carlisle  &  Hammond  allowed  a  claim  for  shortage  in  bill  of  May  2,  amount  $43.80. 

15.  Sold  Butler  Brothers  goods  amounting  to  $712.50,  terms  30  daj^s. 

16.  Allowed  claim  of  Oilman  &  Bates  for  damaged  goods,  amount  $12.50. 

17.  Received  check  from  Hays  Manufacturing  Co.,  $300.00. 

NOTES,  INTEREST,  AND  PARTNERS'  PERSONAL  ACCOUNTS 

PROMISSORY  NOTES 

Promissory  notes  are  generally  known  as  notes. 

A  note  is  a  written  promise,  signed  by  the  maker,  to  pay  a  certain  sum  of  moi.    \ 
at  a  specified  date  or  on  demand,  to  a  certain  person. 


A  PROMISSORY  NOTE 


In  this  illustration  Geo.  R.  Davis  and  Samuel  Stewart  are  the  parties  to  the  note. 

The  maker  of  the  note  is  Geo.  R.  Davis.  When  the  note  is  due  (Dec.  1-19-)  Davis 
will  pay  to  Stewart  the  amount  of  the  note  and  interest. 

The  payee  of  the  note  is  Samuel  Stewart.  When  the  note  is  due  he  will  receive  the 
money  from  Davis,  the  maker. 


NOTES,  INTEREST,  AND  PARTNERS'  PERSONAI/ ACCOUNTS 


81 


Notes  like  the  illustration  may  be  bought  and  sold  the  same  as  merchandise,  except 
that  the  payee  of  a  note  should  indorse  it. 

A  note  may  be  indorsed  by  the  payee  writing  his  name  on  the  back  of  it. 


AN  INDORSEMENT 


For  the  purpose  of  making  bookkeeping  records,  notes  are  of  two  kinds,  notes  receivable 
and  notes  payable. 

NOTES  RECEIVABLE 

Notes  receivable  usually  originate  from  transactions  in  which  the  debtor  desires  to 
postpone  payment,  because  of  a  lack  of  cash.  In  business,  notes  are  frequently  accepted 
from  customers  instead  of  selling  the  goods  on  account,  or  they  are  sometimes  accepted 
from  customers  in  order  to  close  the  customer's  account. 


PROBLEMS  IN  NOTES  RECEIVABLE 

1 .  During  September  and  October  W.  F.  Patterson  sold  goods  and  received  the  following  notes  from 
his  customers:  $125.00,  $164.00,  $85.50,  $210.25,  $116.75,  $104.50,  $162.75.  Of  these  notes  the  following 
were  paid  when  due:   $125.00,  $85.50,  $116.75.    What  was  the  balance  due  him  on  notes? 

2.  On  June  1,  Henry  Wilton  had  on  hand  notes  receivable  to  the  amount  of  $638.47.  During  June 
he  received  notes  from  his  customers  to  the  amount  of  $%7.38,  and  customers  paid  notes  when  due  to 
the  amount  of  $897.94.     What  was  the  balance  due  on  notes  receivable  June  30? 

3.  On  May  1,  James  Hmes  held  the  following  notes  made  by  his  customers:  Lilly  Brothers  $785.00, 
Yates  &  Thorn  $682.75,  F.  F.  Benton  $476.83.  During  May  he  received  money  on  these  notes  as  follows: 
May  4,  Lilly  Brothers  paid  $125;  May  10,  F.  F.  Benton  paid  $100;  May  11,  Yates  &  Thorn  paid  $210.40; 
May  21,  F.  F.  Benton  paid  $216.30;  May  26,  Lilly  Brothers  paid  $326.45.  No  other  transactions  involving 
notes  having  been  made,  find  the  balance  due  on  notes  receivable  on  May  31. 


82 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


4.  Make  a  list  of  the  notes  in  the  third  problem,  show  how  much  was  paid  on  each  note  and  the  balance 
due  on  each  note.  Total  the  balances  due  on  all  the  notes  and  compare  this  total  with  the  result  in  the 
third  problem. 

6.  On  April  1,  Alton  Brooks  &  Co,  had  on  hand  two  notes  as  follows:  One  made  by  City  Dry  Goods 
Co.  for  $2850  and  one  made  by  Sproat  &  Clark  for  $2245.50.  Apr.  10,  City  Dry  Goods  Co.  paid  $1000; 
Apr.  15,  Sproat  &  Clark  paid  $1200.00;  Apr.  24,  City  Dry  Goods  Co.  paid  $750.00  and  gave  a  new  note 
for  the  balance  due  on  the  old  note.  Apr.  27,  Sproat  &  Clark  paid  $545.50.  What  was  the  balance  due 
on  notes  receivable? 

6.  Oct.  1,  Watkins  &  Son  had  notes  receivable  to  the  amount  of  $3268.54.  During  October  they 
received  notes  from  customers  to  the  amount  of  $1647.83.  During  the  month  customers  paid  $1159.75 
on  notes  and  Watkins  &  Son  sold  to  a  bank  customers'  notes  to  the  amount  of  $2185.96.  What  was  the 
balance  due  on  notes  receivable  on  Oct.  31? 

NOTES  RECEIVABLE  ACCOUNT 

This  is  an  account  in  which  is  recorded  all  notes  received  from  customers,  and  all 
notes  disposed  of,  either  by  payment,  renewal,  or  transfer. 

Higgins  &  Black  received  and  disposed  of  notes  as  follows  during  the  month  of  Sep- 
tember. Trace,  mentally,  the  records  of  each  transaction  to  its  place  in  the  illustrative 
Notes  Receivable  account. 

EXERCISE  LIV 

Sept.   3.  Received  from  A.  J.  Blue  a  note  for  10  days  for  bill  of  goods  sold,  $316.80. 

9.  W.  F.  Hawkins  gave  a  note  for  30  days  to  close  his  account.    Amount  of  the  note,  $1000.00. 

12.  Sold  James  Dudley  goods  amounting  to  $450.00  and  received  his  note  at  10  days. 

13.  A.  J.  Blue  paid  his  note  in  full,  $316.80. 

20.  Received  from  Chas.  Sherman  a  note  for  30  days  to  close  his  account,  $500.00. 
22.  James  Dudley  paid  $300  on  his  note  and  gave  a  new  note  at  10  days  for  the  balance. 
26.  Received  a  note  at  30  days  from  James  Brown  for  $276.50  for  goods  sold  to  him. 
28.  Sold  to  the  Union  Trust  Co.  the  note  of  W.  F.  Hawkins. 
30.  Chas.  Sherman  paid  $200  on  his  note. 

NOTES  RECEIVABLE 


Sept. 

3 

A.J.B.— 10  da. 

J 

316 

80 

Sept. 

13 

C 

316 

80 

9 

W.F.H.— 30da. 

J 

1000 

00 

22 

J.D.         C 

300 

00 

12 

J.D.— 10  da. 

J 

450 

00 

22 

J.D.         J 
W.F.H.— Union 

150 

00 

20 

C.S.— 30  da. 

J 

500 

00 

28 

Trust  Co.    C 

1000 

00 

22 

J.D.— 10  da 

J 

150 

00 

30 

C.S. — partpmt.  C 

200 

00 

26 
20 

J.B.— 30  da. 

C.S. — balance 

J 

276 

50 

30 

Balance 

726 

50 

2693 

30 
00 

2693 

30 

Sept. 

300 

Sept. 

20 

22 

J.D. 

150 

00 

26 

J.B. 

276 

50 

NOTES,  INTEREST,  AND  PARTNERS'  PERSONAL  ACCOUNTS  83 

Purpose.  To  contain  a  record  of  all  notes,  signed  by  other  people,  received  in  the 
course  of  business,  and  collected  or  disposed  of  by  endorsing  them  to  other  parties. 

Method.  Debit  Notes  Receivable  account  when  a  note  signed  by  another  is  received. 
Credit  Notes  Receivable  account  when  one  of  these  notes  has  been  disposed  of,  or  partly 
paid. 

Result.  The  difference  between  the  two  sides  of  this  account  should  show  the  Notes 
Receivable  on  hand. 

QUESTIONS  ON   THE  NOTES  RECEIVABLE  ACCOUNT 

1.  What  is  the  total  of  notes  received  by  Higgins  &  Black  during  September?  2.  VThat  is  the  total 
of  notes  paid  by  customers,  received  or  sold  by  Higgins  &  Black?  3.  TMiat  is  the  total  of  notes  paid  by 
customers?  4.  What  is  the  total  of  notes  renewed  by  customers?  5.  What  is  the  total  of  notes  sold  by 
Higgins  &  Black?  6.  Make  a  list  of  the  notes  on  hand  and  show  who  made  them.  7.  Which  side  of  this 
account  should  first  show  the  amount  of  a  note  or  notes?  8.  When  all  the  notes  have  been  paid,  what  will 
be  the  condition  of  the  account? 

BALANCING  AND  RULING  NOTES  RECEIVABLE  ACCOUNT 

This  account  is  seldom  balanced  and  ruled  as  there  is  no  advantage  in  doing  so.  But 
if  there  should  be  a  cause  for  balancing  and  ruling,  it  would  be  balanced  and  ruled  like 
the  illustration. 

In  bringing  down  the  balance,  each  note  making  up  the  balance  should  appear  as  a 
separate  item  unless  there  are  too  many  notes.  If  there  should  be  many  notes  it  would 
be  advisable  to  have  a  special  book  in  which  to  record  each  note  separately. 

The  balance  due  on  notes  receivable  should  be  included  (just  preceding  accounts 
receivable)  among  the  assets  when  a  Balance  Sheet  is  prepared.  But,  before  the  amount 
is  placed  on  the  Balance  Sheet  the  balance  should  be  proved  by  comparing  the  actual 
notes  with  the  balance  as  shown  by  the  account. 

EXERCISE  LV 
Write  up  a  Notes  Receivable  account  from  the  information  given  in  the  third  problem  on  page  81. 
Balance,  rule  and  bring  down  the  balance,  and  submit  your  work  for  approval. 

NOTES  PAYABLE 

Notes  payable  are  generally  issued  by  a  person,  firm  or  corporation  when  goods  are 
not  purchased  on  account.  Or,  they  may  be  issued  to  close  an  account,  to  renew  an  old 
note,  or  to  show  an  obligation  for  money  borrowed. 

PROBLEMS  IN  NOTES  PAYABLE 

1.  During  the  months  of  January  and  February  Wells  &  Co.  issued  notes  payable  amounting  to 
$1473.50.  They  paid  during  this  time  notes  amounting  to  $1232.25.  What  was  the  amount  due  on  notes 
payable  Feb.  28? 

2.  During  March,  Smith  &  Young  gave  notes  to  others  as  follows:  March  1,  in  favor  of  C.  E.  French, 
$45.75;  March  2,  to  the  First  National  Bank  $250.00;  March  5,  to  E.  N.  Banks  $100.00;  March  15,  to  Gill 
&  Co.  $82.57.  On  March  25,  Smith  &  Young  took  up  (paid)  the  note  given  E.  N.  Banks,  $100.00;  March 
31,  they  paid  the  note  due  C.  E.  French,  $45.75.  How  much  did  Smith  &  Yovmg  owe  on  notes  payable 
March  31? 

3.  April  1,  D.  B.  Williams  owed  on  notes  as  follows:  First  National  Bank  $250.75;  H.  E.  Baker  $169.45 
April  5,  he  issued  a  note  to  L.  H.  Hawkinson  for  $225.25.  April  7  he  paid  the  note  issued  to  the  First 
National  Bank.  April  10  he  made  a  note  in  favor  of  M.  B.  Conway  $220.75.  April  15  he  gave  M.  M. 
Goodhand  a  note  for  $175.00.  April  25,  he  paid  the  note  given  L.  H.  Hawkinson.  How  much  did  D.  B. 
Williams  owe  on  notes  on  April  30?    Make  a  list  of  the  notes  not  paid  on  that  date. 


S4 


LYONS'  BOOKKEEPING  AND  ACnOTTNTING 


4.  Henry  Lane  owed  the  Merchants  National  Bank  $500.00  on  a  note  on  June  1.  June  5  he  paid 
$200  on  this  note,  June  12  he  borrowed,  on  a  note,  $1000.00  at  the  Mechanics  &  Traders  Bank.  June  18, 
he  issued  a  note  to  Hornblower  &  Weeks  for  $1500.  June  21  he  paid  the  balance  due  on  the  note  to  the 
Merchants  National  Bank.  June  25,  he  paid  $500.00  on  the  note  in  favor  of  the  Mechanics  &  Traders 
Bank  and  gave  a  new  note  for  the  balance.  How  much  did  he  owe  on  notes  on  June  30?  Show  what 
notes  or  parts  of  notes  were  still  unpaid. 

NOTES  PAYABLE  ACCOUNT 

This  is  an  aeooimt  in  which  is  made  a  record  of  all  notes  issued  and  all  notes  paid  by 
the  business. 

EXERCISE  LVI 

Trace,  mentally,  the  record  of  the  transactions  in  the  following  exercise  to  the  illus- 
trative Notes  Payable  account. 

Sept.  1.  The  proprietor,  M.  M.  Hunter,  started  in  business  owing  Jas.  Hammond  on  a  note  $2000.00. 

2.  Bought  goods  of  Wilton  &  Hoyne  amounting  to  $120.00.    Gave  them  60  day  note  in  payment. 

3.  Gave  Longworth  &  Co.  note  for  $250.00,  due  in  30  days,  for  the  amount  owed  them  on  account. 

4.  Gave  check  to  Jas.  Hammond  for  $500.00  to  apply  on  note  owed  him. 

5.  Gave  check  to  Longworth  &  Co.  for  $100.00  in  part  payment  of  the  note  to  them. 

6.  Paid  the  note  in  favor  of  Wilton  &  Hoyne,  $120.00. 


NOTES  PAYABLE 


Sept. 


J.H. — part  pmt.  C 

L.&Co. —  part 
pmt.  C 

W.&H.  C 

Balance 


500 

100 

120 

1650 

00 

00 
00 
00 

00 

Sept. 

1 

2 

3 

4 
2 

2370 

Sept. 

J.H.  J 

W.&H.— 60 da.  J 
L.&Co.— 30 da.  J 


J.H. — Balance 
L.  &  Co. — Balance 


2000 

120 
250 

2370 


1500 


150 


00 

00 
00 

00 


00 


00 


Puipose.  To  contain  a  record  of  all  notes  issued  in  the  course  of  business  by  the 
1  crson,  firm  or  corporation,  and  all  notes  paid,  renewed,  or  paid  in  part. 

Method.  Credit  Notes  Payable  account  when  each  note  is  issued.  Debit  Notes 
layable  account  when  each  note  is  paid,  renewed,  or  partly  paid. 

Result.     The  balance  of  the  account  is  the  amount  of  notes  payable  not  paid. 


QUESTIONS  ON   THE  NOTES  PAYABLE  ACCOUNT 

1.  What  is  the  total  amount  of  notes  issued  by  M.  M.  Hunter?  2.  What  is  the  total  amount  of  notes 
paid  by  M.  M.  Hunter?  3.  On  which  side  of  Notes  Payable  account  should  a  note  or  notes  first  be  entered? 
4.  Which  side  of  Notes  Payable  account  should  always  be  larger,  if  the  account  is  not  closed?  5.  What 
will  be  the  condition  of  the  account  when  all  notes  were  paid? 


NOTES,  INTEREST,  AND  PARTNERS'  PERSONAL  ACCOUNTS 


85 


BALANCING  AND  RULING  NOTES  PAYABLE  ACCOUNT 

This  account  is  not  often  balanced  and  ruled  except  to  forward  it.  But,  when  it  is 
balanced,  the  amount  of  each  note  or  the  balance  of  each  note  should  appear  in  the  account 
as  a  separate  item,  unless  there  are  many  notes.  (See  the  illustrative  account.)  In  that 
case  a  special  book  should  be  provided  to  contain  a  record  of  each  note  separately.    • 

This  account  represents  a  liability,  and  at  the  end  of  a  fiscal  period  the  balance  should 
be  included  (just  preceding  accounts  payable)  in  the  Balance  Sheet. 


EXERCISE  LVII 


Prepare  a  Notes  Payable  account  from  the  information  given  in  the  third  problem  on  page  83. 
rule  and  bring  down  the  balance,  and  submit  your  work  for  approval. 


Balance, 


INTEREST 

Interest  is  the  use  of  money  for  which  compensation  is  paid. 

Legal  rate.     This  is  the  rate  of  interest  fixed  by  law  to  apply  to  interest  bearing  obli- 
gations when  the  parties  to  the  obligation  have  not  agreed  upon  a  rate  of  interest. 

Maximum  rate.     This  is  the  highest  rate,  that  is  permitted  by  law  to  be  collected. 

» 

PROBLEM  IN  INTEREST 

Nov.    1.  Henry  Wilson,  the  proprietor,  paid  a  note  and  interest  due  today.      Amount  of  interest,  $5.83. 
7.  A  customer  paid  an  old  account  and  interest  due  on  it.    Amount  of  interest,  $L67. 

15.  Collected  cash  for  interest  coupons  on  some  Liberty  Bonds,  $7.00. 
24.  A  customer  paid  a  note  and  interest;  the  interest  was  $2.14. 

30.  The  Dime  Savings  Bank  allowed  hira  credit  for  interest  on  his  bank  balance,  $4.13. 
How  much  did  Mr.  Wilson  receive  for  interest  in  excess  of  what  he  paid? 

INTEREST  ACCOUNT 

This  is  the  account  kept  for  the  purpose  of  showing  how  much  is  paid  for  the  use  of 
money  and  how  much  is  received  for  the  use  of  money. 

EXERCISE  LVIII 

Trace,  mentally,  the  record  of  each  of  the  following  transactions  to  its  place  in  the 
illustrative  Interest  account: 
Dec.    4.  James  Lewis,  the  proprietor,  received  payment  for  a  note  and  interest,  the  interest  being  $3.74. 

10.  Paid  a  note  and  interest  due  at  the  Federal  State  Bank;  the  interest  was  $51.83. 

16.  Received  a  check  in  payment  of  an  old  account  and  interest;  the  interest  was  $2.87. 
22.  Received  cash  for  interest  due  on  a  mortgage,  $12.00. 

31.  The  interest  on  Lewis'  bank  balance  was  $5.62. 


INTEREST 

Dec. 

10 

C 

51 

83 

Dec. 

4 
16 
22 
31 

.  C 
C 
C 
C 

3 

2 

12 

5 

74 
87 
00 
62 

86  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Purpose.  To  contain  a  record  of  all  amounts  paid  for  the  use  of  money  and  of  all 
amounts  received  for  the  use  of  money. 

Method.  Debit  interest  for  all  payments  made  for  the  use  of  money  belonging  to 
some  other  person,  firm  or  corporation.  Credit  interest  for  all  amounts  received  for  the 
use  of  money  belonging  to  the  business. 

Result.  The  balance  of  the  account  will  be  either  the  net  amount  paid  for  the  use 
of  money  or  the  net  amount  received  for  the  use  of  money. 

It  is  sometimes  desirable  in  a  large  business  to  keep  two  accounts  for  interest,  one 
known  as  Interest  Paid  and  the  other,  as  Interest  Received.  The  title  of  each  account 
suggests  what  it  should  contain.  When  these  two  accounts  are  kept,  Interest  Paid  is 
treated  as  a  loss  or  expense,  while  Interest  Received  is  treated  as  an  income,  or  profit. 

QUESTIONS   ON   THE  INTEREST  ACCOUNT 

•       1.  What  does  the  total  of  the  debit  side  show? 

2.  What  does  the  total  of  the  credit  side  show? 

3.  If  the  credit  side  of  the  account  were  larger  than  the  debit,  what  would  the  balance  show? 

4.  If  the  debit  side  of  the  account  were  larger  than  the  credit  side,  what  would  the  balance  show? 

• 

CLOSING  AND  RULING  THE  INTEREST  ACCOUNT 

The  Interest  account  is  closed  or  transferred  into  the  Profit  &  Loss  account  at  the  end 
of  a  fiscal  period,  and  is  then  ruled  the  same  as  the  General  Expense  account. 

EXERCISE  LIX  0 

From  the  information  given  in  the  interest  problem  on  page  85,  prepare  an  Interest  account  and 
submit  your  work  for  approval. 


PROPRIETOR'S  OR  PARTNER'S  PERSONAL  ACCOUNT 

It  is  frequently  necessary  or  desirable  to  keep  an  account  for  the  proprietor  or  for  each 
partner  to  show  how  much  money  and  property  are  taken  from  the  business  for  personal 
use.  This  account  should  also  show  all  allowances  for  salary,  as  it  is  often  the  custom  to 
allow  the  proprietor  or  the  partner  a  salary  the  same  as  any  employee. 

This  method  of  caring  for  personal  charges  and  allowances  is  particularly  desirable 
in  a  partnership  business  or  in  a  manufacturing  business  where  accurate  cost  records  are 
necessary. 

EXERCISE  LX 

Trace,  mentally,  the  record  of  each  transaction  in  the  following  exercise  to  its  place 
in  the  illustrative  account: 

Sept.    4.  Charles  Markley,  proprietor,  drew  cash,  $15.00. 

10.  Paid  proprietor's  life  insurance  premium  by  a  check  for  $41.83. 
14.  Paid  bill  for  gas  used  at  Markley's  residence,  $4.18. 
18,  Paid  F.  G.  Clayton  Co.  $15.85  for  clothing  purchased  by  Markley. 
24.  Paid  Peck  &  Lewis  $28.73  for  groceries  for  proprietor. 

29.  Paid  $4.00  for  proprietor's  telephone  at  his  residence. 

30.  Gave  proprietor  credit  for  his  salary  for  September,  $250.00. 


NOTES,  INTEREST,  AND  PARTNERS'  PERSONAL  ACCOUNTS 

CHARLES   MARKLEY  PERSONAL 


87 


Sept. 


4 
10 
14 
18 
24 
29 


Ins.  premium       C 
Gas  bill  C 

F.G.C.  Co.  C 

P.&L. 
Telephone 


15 

00 

Sept. 

41 

83 

4 

18 

15 

85 

28 

73 

4 

00 

30    Salary 


250 


00 


Purpose.  To  show  amounts  withdrawn  by  the  proprietor  or  a  partner  either  as 
cash  or  the  equivalent  of  cash  and  to  show  the  allowances  made  to  him  as  salary. 

Method.  Debit  the  proprietor's  or  the  partner's  personal  account  for  all  money  paid 
to  him,  for  all  personal  bills  paid  for  him  from  the  partnership  funds,  and  for  all  merchandise 
at  cost  taken  by  him. 

Credit  the  proprietor's  or  the  partner's  personal  account  for  salary  allowances,  bonuses, 
and  for  other  personal  funds  that  come  into  the  business. 

Result.  The  balance  of  the  account  will  be  the  amount  due  the  business  by  the 
proprietor  or  the  partner,  or  the  amount  due  the  proprietor  or  the  partner  by  the  business. 

BALANCING  AND  RULING  PROPRIETOR'S  OR  PARTNER'S  PERSONAL  ACCOUNTS 

While  a  proprietor  or  partner  can  not  legally  owe  himself  money,  nevertheless,  if 
the  balance  is  a  debit,  it  is  generally  considered  as  a  debt  due  the  business  by  the  proprietor 
or  partner.  However,  the  balance  should  not  be  included  with  customers'  accounts 
receivable  on  the  Balance  Sheet  at  the  end  of  a  fiscal  period,  but  should  appear  as  a  separate 
item  in  accounts  receivable. 

Should  the  balance  of  the  proprietor's  or  a  partner's  personal  account  be  a  credit,  it 
should  not  appear  among  the  liabiUties,  on  the  Balance  Sheet,  as  a  creditor's  account, 
but  should  be  included  with  an  appropriate  title  as  an  account  payable.  If  the  proprietor 
or  the  partner  can  not  owe  the  business  money,  it  follows  that  the  business  can  not  (legally) 
owe  him  money. 

The  personal  account  of  the  proprietor  or  the  partner  is  merely  an  accounting  device 
used  to  show  the  financial  relationship,  to  the  business,  of  the  proprietor  or  partner  outside 
of  his  capital  account. 

SET  III  — HARDWARE  BUSINESS  — TWO   MONTHS 

Books  Used.     Purchases  Book,  Sales  Book,  Cash  Book,  and  Journal. 
In  this  set  all  credit  sales  will  be  made  on  30  days'  time. 

CLASSIFICATION   OF  LEDGER  ACCOUNTS 

The  accounts  for  this  set  will  begin  on  page  19  of  the  ledger.    You  should  open  the 
accounts  on  the  pages  indicated  and  allow  the  amount  of  space  specified  for  each  account. 


88  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

If  you  follow  directions  carefully,  each  account  will  have  sufficient  space  for  all  the  entries 
for  March  and  April  transactions. 

Begin  at  top  of  page  1,  Cash  3^  page,  accounts  receivable  follow;  allow  3^  page 
for  an  account  with  each  customer  (there  are  12  customers).  On  page  5  Notes  Receivable 
(middle  3^);  the  lower  }/i  of  page  5,  Merchandise  Inventory;  follow  on  page  6  with 
accounts  payable,  allowing  }/^  page  for  an  account  with  each  creditor  (there  are  7  creditors) . 
On  page  8  allow  3^  page  (lower  }/£)  for  Notes  Payable.  On  page  9  John  Harris,  Pro- 
prietor, 3^  page;  John  Harris,  Personal,  3^  page;  on  page  10  Harry  T.  Mitchell,  Partner. 
Page  11;  Merchandise  Sales  and  Merchandise  Purchases  3^  page  each;  page  12,  General 
Expense;  page  13,  Interest;  page  14,  Profit  &  Loss. 

MEMORANDA  OF  TRANSACTIONS   FOR  MARCH 

John  Harris  has  been  engaged  in  the  wholesale  hardware  business  at  68  W.  State  St. 
He  has  decided  to  take  in  a  partner,  Harry  T.  Mitchell,  who  is  to  invest  cash  equal  to  one 
fourth  of  the  net  assets  of  Harris.    The  firm  is  to  be  known  as  Harris  &  Mitchell. 

All  profits  and  losses  are  to  be  divided  as  follows:   Harris  34  and  Mitchell  3^. 

A  new  set  of  books  is  to  be  opened,  and  for  this  purpose  you  are  given  the  following 
information  supplied  by  Harris  from  a  set  of  books  which  he  had  kept. 

Mar.  1.  Cash  $  842.78 

Notes  Receivable : 

Note  by  Guilbert  Construction  Co.,  at  30  days  interest  at  6%,  dated  Feb.  24, 19 — ,  for      248.6U 

Note  by  William  Fisher,  at  90  days,  interest  at  6%,  dated  Jan.  24, 19—,  for  300.00 

Accounts  Receivable: 

Bates  &  Rogers,  1018  Lincohi  Bidg.  429.86 

General  Construction  Co.,  327  Hammond  Bldg.  287.95 

YuUer  Construction  Co.,  114  Union  Trust  Bldg.  214.39 

Foley  Brothers,  618  Washington  St.  102.12 

City  Gas  Co.,  100  E.  Adams  Ave.  192.13 

Mdse.  Inventory  2187.44 

Accounts  Payable: 

Cincinnati  Saw  Co.,  Cincinnati,  O.  218.47 

American  Steel  &  Wire  Co.,  Cleveland,  O.  108.76 

Stanley  Rule  &  Level  Co.,  New  Britain,  Conn.  85.62 

Yale  &  Towne  Mfg.  Co.,  Bridgeport,  Conn.  143.84 

Harry  T.  Mitchell  invested  cash  1062.15 

Prepare  the  necessary  opening  entries  and  post  the  amounts  to  the  proper  ledger 
accounts. 

After  the  above  work  is  completed,  proceed  with  the  work  for  the  month. 

Mar.    1.  Paid  rent  for  March,  $125.00. 

2.  Sold  Thomas  Paving  Co.,  1142  Carroll  St.,  4  doz.  Shovels  @  $18.50,  3  doz.  Picks  @  $20.60. 

2.  Sold  General  Construction  Co.,  25  r  Building  Paper  @  $1.85,  10  kg.  8d  Nails  @  $4.30,  3  doz. 
Shovels  @  $18.60. 

3.  Paid  balance  due  American  Steel  &  Wire  Co,  Mar.  1. 

3.  Received  bill  from  Yale  &  Towne  Manufacturing  Co.  for  $82.47,  terms  30  da.,  bill  dated  Feb.  28. 

4,  Sold  Citizens  Telephone  Co.,  112  Summit  St.,  2  doz.  Rim  Locks  @  $6.15,  8  kg,  20d  Spikes  @ 
$4.10,  4  doz.  Picks  @  $20.25. 

4.  Sold  Builders  &  Pavers  Supply  Co.,  718  Cherry  St.,  20  r  Tar  Paper  @  $2.45,  4  doz  Shovels  @ 
$18.20. 


SET  III— HARDWARE  BUSINESS— TWO  MONTHS  89 

Mar.    5.  Received  biU  from  American  Steel  &  Wire  Co.,  for  $216.28,  terms  30  da.,  bill  dated  Mar.  3. 

5.  Received  check  from  Bates  &  Rogers  for  balance  of  account  on  Mar.  1. 

6.  Paid  Stanley  Rule  &  Level  Co.,  balance  due  Mar.  1. 

6.  Received  check  from  Foley  Brothers  for  balance  due  Mar.  1. 

8.  Sold  Inland  Steel  Co.,  2400  S.  Park  St.,  2  doz.  Yale  Locks  @  $16.25,  10  doz.  Shovels  @  $17.65, 
12  kg.  20d  Spikes  @  $4.05. 

8.  Sold  Davis  Building  Co.,  814  Ford  Bldg.,  1000  ft,  Ridge  RoU  @  4 He,  20  kg.  8d  Nails  @  $4.30, 
3  doz.  Shovels  @  $18.25. 

9.  Received  check  from  City  Gas  Co.,  for  balance  due  Mar.  1. 

9.  Allowed  General  Construction  Co.,  15c  per  roll  on  25  rolls  building  paper  delivered  in  bad  con- 
dition. 
10.  Received  from  Fuller  Const.  Co.  a  note  for  $150  at  30  days,  interest  at  6%,  to  apply  on  account. 

10.  Sold  Bates  &  Rogers,  10  kg  6d  Nails  @  $4.50,  20  kg  20d  Spikes  @  $4.15,  12  kg  8d  Nails  @  $4.25. 

11.  Received  credit  memorandum  from  Yale  &  Towne  Manufacturing  Co.  for  $6.85,  shortage  in 
shipment,  bill  Feb.  28. 

11.  Paid  Morton  Cartage  Co.  for  freight  and  cartage  to  date  on  goods  purchased  $62.86. 

12.  Sold  to  the  City  Water  Works,  3  doz.  Shovels  @  $18.35,  2  doz.  Picks  @  $21.15,  15  r  Tar  Paper 
@  $2.45. 

12.  Received  from  General  Construction  Co.  a  note  for  60  days,  at  6%,  for  balance  due  Mar.  1. 

13.  Sold  Fuller  Construction  Co.,  25  r  Tar  Paper  @  $2.45,  40  r  Building  Paper  @  $1.95. 
13.  Cash  sales  of  merchandise,  $102.68. 

15.  Paid  Cincinnati  Saw  Co.  balance  due  Mar.  1. 

15.  Received  bill  from  American  Steel  &  Wire  Co.  for  $91.67,  terms  30  da.,  bill  dated  Mar.  12. 

16.  Paid  salaries,  $112.75. 

16.  Paid  Yale  &  Towne  Manufacturing  Co.  balance  due  Mar.  1. 

17.  Paid  Citizens  Telephone  Go's,  bill,  $12.85.    Paid  Union  Towel  Supply  Co.  $3.50. 

17.  Paid  premium  due  on  Harris'  life  insurance  policy,  $102.18. 

18.  Sold  Foley  Brothers,  24  r  Building  Paper  @  $1.85,  3  doz.  Shovels  @  $18.15. 

18.  Received  bill  from  General  Manufacturing  Co.,  New  Britain,  Conn.,  for  $286.46,  terms  30  da., 
date  of  bill  Mar.  14. 

19.  Sold  City  Gas  Co.,  2  doz.  Picks  @  $20.60,  4  doz.  Shovels  @  $18.30,  1  doz.  Yale  Locks  @  $12.40. 

19.  Paid  Edison  Light  &  Power  Go's,  bill,  $18.68. 

20.  Sold  Union  Hardware  Co.,  412  Maple  St.,  12  r  Tar  Paper  @  $2.55,  2  doz.  Mortise  Locks  @ 
$21.65. 

20.  Sold  Thomas  Paving  Co.  10  r  Tar  Paper  @  $2.55,  4  kg.  lOd  Nails  @  $4.25,  2  doz.  T  Hinges 

@  $2.45. 
22.  John  Harris,  partner,  withdrew  $100.00  for  personal  use. 

22.  Received  bill  from  Buhl  Stamping  Co.,  Detroit,  Mich.,  for  $187.12,  terms  30  da.,  date  of  bill 
Mar.  15. 

23.  Received  bill  from  Rex  Paper  Products  Co.,  Buffalo,  N.  Y.,  for  $482.58,  terms  30  da.,  date  of 
bill  Mar,  18. 

23.  Sold  Citizens  Telephone  Co.,  10  doz.  T  Hinges  @  $3.10,  4  doz.  Yale  Locks  @  $18.40. 

24.  Sold  Builders  &  Pavers  Supply  Co.,  20  kg.  20d  Spikes  @  $4.00,  50  r  Tar  Paper  @  $2.45,  80  r 
Building  Paper  @  $1.80. 

24.  Sold  Inland  Steel  Co.,  6  doz.  Shovels  @  $18.00,  24  Circular  Saws  @,  $4.30. 

25.  Received  check  from  Bates  &  Rogers,  $178.50. 

25.  Cash  sales  of  merchandise,  $121.86. 

26.  Paid  for  books  and  stationery,  $21.85. 

26.  Received  from  Fuller  Construction  Co.  $175.00  on  account.  • 

26.  Received  from  Guilbert  Construction  Co.  a  check  for  note  and  interest  due  today.    Amount  of 
note,  $248.60;  amount  of  interest,  $1.24. 

27.  Paid  Morton  Cartage  Co.  for  freight  and  drayage  to  date  $108.64,  on  goods  purchased. 
27.  Sold  Davis  Building  Co.  10  doz.  Mortise  Locks  @  $23.85,  12  kg.  20d  Spikes  @  $4.00. 

29.  Received  credit  memorandum  from  General  Manufacturing  Co.  for  $27.18  for  goods  not  shipped, 
but  included  in  bill  of  Mar.  18. 


90  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Mar.  29.  Allowed  a  credit  to  Builders  &  Pavers  Supply  Co.  for  $8.00,   overcharge  of  10c  per  roll  for  80 
rolls  Building  Paper  sold  Mar.  24. 
30.  Received  bill  from  Yale  &  Towne  Manufacturing  Co.  for  $102.18,  terms  30  da.,  date  of  bill 

Mar.  24. 
30.  Received  bill  from  Rex  Paper  Products  Co.  for  $315.80,  terms  30  da.,  date  of  bill  Mar.  26. 

30.  Received  bill  from  Buhl  Stamping  Co.,  for  $218.97,  terms  30  da.,  date  of  bill  Mar.  27. 

31.  Paid  salaries  to  date,  $229.75. 

31.  Received  check  from  General  Construction  Co.  for  $141.30. 

31.  Davis  Building  Co.  returned  10  doz.  Mortise  Locks  @  $23.85,  billed  them  on  Mar.  27,  as  they 
were  the  wrong  kind. 

PROGRAM   FOR  CLOSING 

1.  Post  and  take  a  trial  balance. 

2.  Close  and  rule  the  special  books  of  original  entry.  ^ 

3.  Prepare  a  Profit  and  Loss  Statement. 

One  new  account  (Interest)  will  appear  on  the  Profit  and  Loss  Statement.  It  should 
be  placed  immediately  after,  and  be  added  to  the  gross  profit  to  show  the  total  profit 
for  the  period;  then  from  the  total  profit,  deduct  the  expenses  for  the  period;  and  the 
remainder  should  be  the  net  profit  for  the  period. 

Study  the  following  illustration: 


Gross  Profit 
Interest 

Total  Profit 
General  Expenses 

****** 
*♦*•*♦ 

Net  Profit 

****** 

4.  Prepare  a  Balance  Sheet. 

Two  new  accounts  will  appear  on  this  Balance  Sheet,  John  Harris,  Personal  and 
Notes  Receivable. 

The  former  account  is  in  the  nature  of  an  account  receivable  and  is  included  as  such 
though  it  should  appear  with  a  separate  heading.  Notes  Receivable  should  immediately 
precede  Accounts  Receivable  on  the  Balance  Sheet. 

Study  the  following  illustration: 


Notes  Receivable 

Accounts  Receivable:    Customers 

John  Harris,  Personal 


♦  **■  ** 
*♦♦•♦* 


5.  Make  the  necessary  closing  journal  entries,  and  post  them. 

6.  Rule  the  ledger. 

7.  Take  a  trial  balance  after  closing. 

MEMORANDA  OF  TRANSACTIONS  FOR  APRIL 

Apr.  1.  Harris  and  Mitchell  have  decided  to  dissolve  partnership.  Mitchell  is  to  withdraw  from  the  busi- 
ness, in  cash,  the  amount  of  his  net  capital  as  shown  by  his  capital  account.  Make  the  proper 
entry. 


SET  III— HARDWARE  BUSINESS— TWO  MONTHS  91 

DISSOLUTION  OF  A  PARTNERSHIP 

A  partnership  may  be  dissolved  in  any  of  the  following  ways: 

I.  By  agreement;  II.  By  Act  of  One  Party;  III.  By  Decree  of  Court;  IV.  By 
Operation  of  Law. 

Upon  dissolution  there  should  be  an  accounting  of  partnership  property  and  a  settle- 
ment of  their  affairs.  The  method  of  the  accounting  would  seldom  differ  no  matter  which 
one  of  the  above  causes  brought  about  the  dissolution. 

It  should  be  understood  that  in  the  preceding  partnership  the  remaining  partner  is 
not  buying  the  interest  of  the  outgoing  partner,  but  rather  the  outgoing  partner  is  with- 
drawing from  the  business.  The  effect  of  the  one  partner  in  leaving  is  to  reduce  the  capital 
employed  in  the  business. 

If  Harris  were  purchasing  the  interest  of  Mitchell  and  used  funds  outside  the  business 
for  it,  a  different  entry  would  be  required  to  record  the  transaction.  The  entry  in  that 
case  would  be  as  follows: 

Harry  T.  Mitchell,  Partner  $1119.58 

John  Harris,  Partner  $1119.58 

This  transaction  does  not  reduce  the  capital  employed  in  the  business. 

If  Harris  purchased  the  interest  of  Mitchell,  using  funds  from  the  business,  the  effect 
would  be  to  reduce  the  capital  employed  in  the  business,  and  the  entry  would  be  similar  to 
the  one  made  for  Mitchell's  withdrawal. 

No  mention  has  been  made  here  of  the  value  of  the  good  will  of  the  outgoing  partner, 
though  this  is  usually  an  important  question  in  partnership  affairs.  Good  will  will  be 
treated  in  a  subsequent  chapter. 

Apr.    1.  Paid  rent  for  April,  $125.  , 

2.  Received  cash  from  Thomas  Paving  Co.,  $135.80. 

2.  Received  bill  from  General  Manufacturing  Co.  for  $214.93,  terms  30  da.,  date  of  bill  Mar.  29. 

3.  Sold  Bates  &  Rogers  20  kg.  8d  Nails  @  $4.15,  2  doz.  Yale  Locks  #  $18.75. 
3.  Paid  American  Steel  &  Wire  Co.  $307.95. 

5.  Borrowed  $500  of  the  Union  Trust  Co.  on  a  note  for  60  days,  at  6%  interest. 

6.  Sold  Fuller  Construction  Co.  10  kg.  20d  Spikes  @  $3.95. 
6.  Received  check  from  Citizens  Telephone  Co.  for  $126.10. 

6.  Received  bill  from  Stanley  Rule  &  Level  Co.  for  $76.48,  terms  30  da.,  date  of  bill  Apr.  1. 

6.  Sold  General  Construction  Co.,  5  kg.  4d  Nails  @  $4.75,  30  r  Building  Paper  @  $1.80. 

7.  Paid  Yale  &  Towne  Manufacturing  Co.  $177.80. 

7.  Received  check  from  Builders  &  Pavers  Supply  Co.,  $113.80. 

8.  Received  bill  from  American  Steel  &  Wire  Co.  for  $182.19,  terms  30  da.,  date  of  bill  Apr.  4. 

8.  Sold  Foley  Brothers  4  doz.  Picks  ®  $19.85,  15  r  Tar  Paper  @  $2.40. 

9.  Received  check  from  Inland  Steel  Co.  for  $257.60. 

9.  Received  note  for  30  days,  at  6%  interest,  from  Davis  Building  Co.  for  $233.75. 

9.  Received  from  FuUer  Construction  Co.  a  check  for  note  and  interest  due  today.    Amount  of  note 

$150.00,  interest  $0.75. 
10.  Sold  Thomas  Paving  Co.  3  doz.  Shovels  @  $17.40,  20  r  Tar  Paper  @  $2.30,  4  kg.  8d  Nails  @ 

$4.10. 
10.  Paid  freight  and  cartage  on  merchandise  purchased,  $63.94. 
12.  Cash  sales,  $120.18. 

12.  Paid  General  Manufacturing  Co.  $259.28. 

13.  Sold  Union  Hardware  Co.,  40  r  Tar  Paper  @  $2.25,  100  r  Building  Paper  @  $1.75. 
13.  Sold  City  Water  Works,  2  doz.  Shovels  @  $18.00,  20  r  Tar  Paper  @  $2.40. 


92  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Apr.  14.  Received  bill  from  Rex  Paper  Product  Co.  for  $507.28,  terms  30  da.,  dated  Apr.  10. 

14.  Paid  Buhl  Stamping  Co.  $187.12. 

15.  Received  check  from  City  Water  Works,  $134.10. 

15.  Paid  salaries,  $116.60. 

16.  Returned  to  Stanley  Rule  &  Level  Co.  part  of  goods  covered  by  bill  of  Apr.  1,  $21.08. 

16.  Sold  Inland  Steel  Co.  16  Saws  @  $11.20,  2  doz.  Shovels  @  $17.20. 

17.  John  Harris  took  for  his  own  use  2  Yale  Locks  @  $1.20,  5  r  Tar  Paper  @  $1.90. 

17.  Union  Hardware  Co.  was  allowed  credit  for  5  rolls  Building  Paper  @  $1.75,  badly  damaged. 
19.  Received  bill  from  Buhl  Stamping  Co.  for  $132.67,  terms  30  da.,  dated  Apr.  14. 

19.  Received  bill  from  Rex  Paper  Products  Co.  for  $214.35,  terms  30  da.,  dated  Apr.  16. 

20.  Paid  Rex  Paper  Products  Co.  $482.58. 

20.  Sold  Citizens  Telephone  Co.  14  Saws  @  $6.20,  100  r  Building  Paper  @  $1.80. 

21.  Received  check  from  Foley  Brothers  for  $98.85. 

21.  Sold  Builders  &  Pavers  Supply  Co.,  25  kg.  8d  Nails  ®  $4.25,  35  r  Building  Paper  @  $1.85. 

22.  Received  check  from  City  Gas  Co.  for  $126.80. 

22.  Paid  Citizens  Telephone  Co.  bill,  $10.85;  Union  Towel  Supply,  $3.50;  Edison  Light  &  Power  Co., 
$16.74. 

23.  Received  bill  from  American  Steel  &  Wire  Co.  for  $247.86,  terms  30  da.,  dated  Apr.  20. 

23.  Received  bill  from  Cincinnati  Saw  Co.  for  $110.69,  terms  30  da.,  dated  Apr.  19. 

24.  Received  check  from  Citizens  Telephone  Co.  for  $104.60. 

24.  Sold  City  Gas  Co.  21  kg.  16d  Spikes  @  $4.05,  8  Saws  @  $16.40. 

24.  Received  from  Wilham  Fisher  check  for  note  and  interest  due  today.    Amount  of  note  $300.00, 

amoimt  of  interest  $4.50. 
26.  Received  check  from  Inland  Steel  Co.  for  $213.60. 

26.  Sold  General  Construction  Co.,  10  doz.  Yale  Locks  @  $19.60,  11  Saws  @  $7.85. 

27.  Received  check  from  Builders  &  Pavers  Supply  Co.,  $346.50. 

27.  Paid  Buhl  Stamping  Co.  $218.97. 

28.  Paid  Rex  Paper  Products  Co.  $315.80. 

28.  Paid  freight  and  cartage  on  merchandise  purchases,  $51.87. 

29.  Sold  Davis  Building  Co.  3  doz.  Mortise  Locks  @  $21.50,  2  doz.  Yale  Locks  @  $20.25,  20  r  Build- 
ing Paper  @  $1.80. 

29.  Received  bill  from  General  Manufacturing  Co.  for  $118.47,  terms  30  da.,  dated  Apr.  24. 

30.  Paid  salaries,  $116.35. 

30.  Paid  for  catalogs,  list  prices,  and  some  special  advertising  $427.80. 


PROGRAM   FOR  CLOSING 

1.  Close  and  rule  the  special  books  of  original  entry. 

2.  Post  all  entries  and  take  a  trial  balance. 

3.  Prepare  a  Profit  and  Loss  Statement. 

4.  Prepare  a  Balance  Sheet. 

In  preparing  the  Balance  Sheet  you  will  have  one  new  account, — Notes  Payable. 
This  account  is  included  among  the  liabilities  and  is  placed  immediately  preceding  accounts 
payable. 

Study  the  following  illustration: 

Notes  Payable  *♦*•** 

Accounts  Payable  ***♦•♦♦ 

Total  Liabilities  ***♦•*• 


HOW  TO  ANALYZE  AN  ACCOUNT 


93 


Each  item  of  the  liabilities  is  placed  in  the  first  amount  column  and  the  total  is  extended 
to  the  second  amount  column  where  it  is  conveniently  placed  to  subtract  it  from  the  total 
assets. 

5.  Make  the  necessary  closing  journal  entries  and  post  them. 

6.  Rule  the  ledger. 

7.  Take  a  trial  balance  after  closing  the  ledger. 

Note. — To  provide  additional  drill  in  making  journal  entries  and  to  secure  rapidity  of  thought  on 
the  part  of  the  student,  it  is  here  suggested  that  the  transactions  covered  by  this  set  be  orally  journahzed 
in  class.     This  work  should  be  completed  in  20  minutes. 

HOW  TO  ANALYZE  AN  ACCOUNT 

It  frequently  becomes  necessary  to  know  what  has  actually  been  included  in  an  account 
during  a  previous  period.    This  information  is  readily  obtained  by  analyzing  the  account. 
The  following  illustration  is  an  analysis  of  the  General  Expense  account  on  page  18. 

ANALYSIS  OF  GENERAL  EXPENSE 


Salaries 

$59 .  75 
60.50 
25 .  50 

$145.75 


Elec.  Light 


$3.25 
.75 

$2.50 


Telephone 


$12.50 


Telegrams 

$  .50 

.50 


$1.00 


Stationery 


$10.50 


Summ 
Salaries 
Elec.  Lt. 
Telephone 
Stationery 
Postage 
Rent 
Telegrams 


Postage 


$13 .  00 
2.50 

$10.50 


ary 


$145 . 75 
2.50 
12.50 
10.50 
10.50 
50.00 
1.00 


$232.75 


Rent 


$50 . 00 


An  analysis  serves  two  purposes:  First,  it  shows  in  detail  all  the  different  items  that 
compose  the  account.  Second,  it  will  reveal  any  improper  charges  or  credits  to  the  account 
analyzed.    Auditors  frequently  analyze  accounts  to  determine  incorrect  debits  and  credits. 

The  principle  of  analysis  can  be  used  to  determine  the  component  parts  of  any  account, 
the  accuracy  of  which  is  questioned. 


EXERCISE  LXI 

1.  Analyze  the  General  Expense  account  shown  on  the  ledger  of  Harris  &  Mitchell  at  the  end  of  March. 

2.  Analyze  the  General  Expense  account  shown  on  the  ledger  of  John  Harris  at  the  end  of  April. 

3.  Compare  the  two  General  Expense  accounts  just  analyzed  and  note  carefully  any  unusual  change 
in  the  amounts  of  the  items  composing  these  accounts. 


94  LYONS*  BOOKKEEPING  AND  ACCOUNTING 

I 

EXERCISE  LXII 

Make  a  Comparative  Profit  and  Loss  Statement  and  a  Comparative  Balance  Sheet  for  the  months  of 
March  and  April. 

QUESTIONS  ON   COMPARISON 

1.  Did  the  net  purchases  for  April  increase  or  decrease  as  compared  with  the  net  purchases  for  March? 

2.  Did  the  general  expenses  for  April  increase  or  decrease  as  compared  with  the  general  expenses  for  March? 

3.  What  particular  item  caused  the  unusual  increase  in  general  expenses  for  April?  (Refer  to  your  analysis 
of  General  Expense  account  for  March  and  April.)  4.  Make  a  list  of  the  asset  and  liability  accounts  that 
increased  during  April.  5.  Make  a  hst  of  asset  and  Uability  accounts  that  decreased  during  April.  6.  The 
Profit  and  Loss  Statement  for  April  shows  a  net  loss.  What  was  the  cause  of  the  loss?  7.  If  the  one  large 
bill  for  catalogs  etc.  had  not  been  charged  to  expenses  for  April,  what  would  the  profits  for  April  have  been? 
8.  Omitting  this  one  item  (the  charge  for  catalogs  etc.),  were  the  expenses  for  April  more  or  less  than  those 
for  March? 

TEST  EXERCISE  LXIV 

In  the  following  test  use,  as  books  of  original  entry,  a  purchases  book,  a  cash  book, 
and  a  journal.  In  this  business  all  sales  are  made  for  cash,  hence  no  sales  book  is  used. 
The  volume  of  sales  each  day  is  determined  from  a  cash  register. 

Make  the  necessary  entries,  post  and  take  a  trial  balance,  use  journal  and  ledger  paper. 

Time  necessary,  4-5  minutes 

June    1.  John  B.  Terns  invested  cash  $1200.00. 

1.  Received  bill  from  Parke,  Davis  &  Co.,  $108.78,  terms  30  days. 

1.  Sales  for  the  day,  $76.84. 

2.  Paid  rent  for  June,  $50.00. 

2.  Sales  for  the  day,  $72.37. 

3.  Sales  for  the  day,  $77.10. 

4.  Paid  electric  hght  bill,  $12.18. 
4.  Sales  for  the  day,  $68.58. 

6.  Sales  for  the  day,  $78.52, 

6.  Received  bill  from  Dow  Chemical  Co.,  $68.43,  terms  30  days. 

6.  Sales  for  the  day,  $72.85. 

8.  Paid  gas  bill,  $6.72. 

8.  Sales  for  the  day,  $70.80. 

9.  Gave  Parke,  Davis  &  Co.  a  30-day  note  for  $95.00. 

9.  Received  credit  memorandum  from  Parke,  Davis  &  Co.  for  $13.78  for  goods  returned. 
9.  Sales  for  the  day,  $72.94. 
10.  Received  bill  from  Eastman  Kodak  Co.,  $86.39,  terms  30  days. 

10.  Sales  for  the  day,  $78.59. 

11.  Paid  express  charges  on  goods  from  Eastman  Kodak  Co.,  $10.43. 

11.  Sales  for  the  day,  $64.18. 

12.  Received  bill  from  Central  Drug  Co.,  $58.13. 

12.  Sales  for  the  day,  $84.90. 

13.  Sales  for  the  day,  $79.64. 
13.  Paid  salaries,  $120.00. 

OFFICE  EQUIPMENT  AND  DELIVERY  EQUIPMENT  ACCOUNTS 

PROPERTY  USED   IN   THE   BUSINESS 

Many  of  the  things  purchased  by  a  business  are  for  its  own  use.  It  is  generally  neces- 
sary to  have  some  equipment  for  an  office  and  for  delivering  goods  sold,  such  as  desks, 
chairs,  tables,  filing  cabinets,  typewriters,  rugs,  safe,  horses  and  wagons,  motor  vehicles, 
etc. 


OFFICE  EQUIPMENT  AND  DELIVERY  EQUIPMENT  ACCOUNTS 
OFFICE  EQUIPMENT  ACCOUNT 


95 


This  is  an  account  kept  to  show  the  amount  of  the  investment  in  equipment  used 
in  the  office. 

EXERCISE  LXI 

Trace  the  record  of  the  items  in  the  following  exercise  to  the  illustrative  account  with 
Office  Equipment: 

Oct.    1.  John  Oilman,  proprietor,  opened  a  set  of  books  for  his  business  and  among  the  assets  was  oflBce 
equipment,  $185.00. 
10.  Bought  a  desk  for  a  typewriter,  $30.00. 
18.  Bought  a  fiUng  cabinet,  $45.00. 
25.  Bought  3  chairs,  $24.00. 
30.  Sold  at  cost,  $10,  a  table  which  he  had  when  the  books  were  opened. 

OFFICE  EQUIPMENT 


Oct. 


1 
10 

18 
25 


Inventory  J 

Typewriter  desk  C 
Filing  Cabinet  C 
Chairs  C 


185 

00 

Oct. 

30 

30 

00 

45 

00 

24 

00 

Table 


10 


00 


Purpose.  The  purpose  of  the  Office  Equipment  account  is  to  show,  at  cost,  the  amount 
invested  in  office  equipment. 

Method.  Debit  this  account  for  the  cost  of  all  office  furniture,  furnishings  and 
appliances. 

Credit  it  for  the  cost  of  all  office  furniture,  furnishings  and  appliances  disposed  of. 

Result.  The  balance  of  this  account  should  show,  at  cost,  the  amount  of  money- 
invested  in  office  equipment. 

As  a  convenient  record  there  should  be  on  file  in  the  office  safe  a  complete  inventory 
of  all  articles,  and  their  costs,  that  have  been  charged  to  the  Office  Equipment  account. 
This  inventory  should  be  brought  up-to-date  at  the  end  of  each  fiscal  period  and  its  total 
should  agree  with  the  balance  of  the  Office  Equipment  account. 

Furthermore,  it  furnishes  an  excellent  record,  in  connection  with  the  account,  for 
proving  the  amount  of  a  loss  in  case  of  fire. 

BALANCING  AND  RULING  OFFICE  EQUIPMENT  ACCOUNT 

It  is  not  necessary  to  balance  this  account  except  to  forward  it  to  another  page  or  to 
show  the  total  investment  as  one  amount.  After  balancing  it  is  ruled  with  single  and 
double  red  lines  like  the  Cash  account. 

QUESTIONS  ON  OFFICE  EQUIPMENT  ACCOUNT 
1.  What  should  the  debit  side  of  this  account  show?    2.  What  should  the  credit  side  show?    3.  What 
should  the  balance  of  the  account  show?    4.   What  kind  of  a  balance  should  the  account  always  show? 
5.   How  would  the  accuracy  of  the  balance  of  this  account  be  proved?    6.   Under  what  circumstances 
would  this  account  have  no  balance? 


96 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


DELIVERY  EQUIPMENT  ACCOUNT 

This  account  should  show,  at  cost,  the  amount  invested  in  equipment  used  for  deliver- 
ing goods. 

EXERCISE  LXIl 

Trace  the  record  of  the  items  in  the  following  transactions  to  the  illustrative  account: 

Oct.    1.  John  Gilman,  proprietor,  opened  a  set  of  books  for  his  business  and  among  other  assets  he  had 
delivery  equipment  valued  at  $490.00. 
10.  Bought  a  brown  horse,  Dick,  for  $160.00. 
12.  Bought  a  delivery  wagon  for  $200.00. 
15.  Bought  one  set  of  harness  for  $35.00. 
27.  Sold  one  horse,  Tom,  at  cost,  $100.00. 

DELIVERY  EQUIPMENT 


Oct. 


1 

Inventory 

J 

10 

Dick 

C 

12 

Wagon 

C 

15 

Harness 

.    c 

490 

00 

Oct. 

27 

160 

00 

200 

00 

35 

OC 

Tom 


100 


00 


Purpose.  The  purpose  of  the  Delivery  Equipment  account  is  to  show,  at  cost,  the 
amount  invested  in  delivery  equipment. 

Method.  Debit  this  account  for  the  cost  of  all  horses,  wagons,  harness,  motor  vehicles 
and  other  equipment  used  for  delivering  goods. 

Credit  it  for  the  cost  of  any  article  that  is  disposed  of. 

Result.  The  balance  of  this  account  should  show,  at  cost,  the  amount  invested  in 
delivery  equipment. 

As  a  ready  reference  from  which  may  be  obtained  information  as  to  what  has  been 
charged  to  this  account,  there  should  be  on  file  in  the  office  safe  a  complete  inventory 
of  all  things,  at  cost,  composing  it.  This  inventory  should  be  brought  up  to  date  at  the 
end  of  each  fiscal  period  and  its  total  should  agree  with  the  balance  of  the  Delivery  Equip- 
ment account. 

The  inventory  also  furnishes  complete  information  for  obtaining  insurance  and  for 
proving  the  amount  of  the  loss  in  case  of  fire.  Business  houses  maintaining  a  large  equip- 
ment of  motor  vehicles  for  delivery  purposes  find  a  subsidiary  record  of  this  sort  almost 
indispensable. 

BALANCING  AND  RULING  DELIVERY  EQUIPMENT  ACCOUNT 

This  account  should  not  be  balanced  except  to  forward  it  or  to  show  the  balance  of 
it  as  one  amount.  When  it  is  balanced  it  should  be  ruled  with  single  and  double  red  lines 
like  the  Cash  account. 

QUESTIONS  ON  THE  DELIVERY  EQUIPMENT  ACCOUNT 
1.  What  should  the  debit  side  of  this  account  show?    2.  What  should  the  credit  side  of  this  account 
show?   3.  What  should  the  balance  of  it  show?   4.  What  kind  of  a  balance  should  it  always  show?   5.  How 
would  the  accuracy  of  the  balance  be  proved?    6.  Under  what  circumstances  would  this  account  have  no 
balance? 


SOME  ACCOUNTS  WHICH  MAY  CONTAIN  DEFERRED  CHARGES  97 

SOME  ACCOUNTS  WHICH  MAY  CONTAIN   DEFERRED   CHARGES 

A  deferred  charge  is  an  item  or  items  which  were  included  in  expenses  during  a  par- 
ticular fiscal  period  but  not  actually  consumed  during  that  period. 

The  following  are  examples  of  items  that  may  be  charged  to  expense  during  a  fiscal 
period,  yet  may  not  be  consumed  during  that  period. 

Example  I.  On  December  27,  a  wholesale  house  received  and  entered  a  bill  for 
catalogs  amounting  to  $400.00,  charging  it  to  general  expense.  These  catalogs  were  for 
distribution  during  the  following  year  when  new  prices  were  to  be  in  effect. 

Should  this  amount  be  included  in  the  general  expense  and  charged  to  Profit  &  Loss, 
or  should  it  be  "carried  over"  to  the  following  fiscal  period? 

Example  II.  November  4,  a  bakery  received  and  entered  a  bill  for  50,000  cardboard 
cartons  used  for  packing  and  shipping  cookies;  the  amount  of  the  bill  was  $1500.00  and 
it  was  charged  to  expense.  On  Dec.  31,  the  bakery  had  used  only  10,000  of  these  cartons, 
having  on  hand  40,000. 

(a)  Is  it  proper  to  include  the  whole  amount  of  this  bill  as  an  expense  for  this  year? 

(b)  How  much  of  the  bill  is  really  expense  for  this  year? 

(c)  How  much  of  the  bill  should  be  "carried  over"  to  the  following  fiscal  period? 

INSURANCE 

Property  may  be  damaged  or  destroyed  by  fire,  water,  storms,  accidents,  etc.  The 
owner  of  property  may  provide  for  compensation  in  case  of  loss  by  insuring  the  property. 
There  are  companies  organized  for  the  purpose  of  entering  into  contracts  by  which  they 
agree  to  indemnify  an  owner  for  damage  to  property,  or  loss  of  property,  from  almost  any 
cause  imaginable. 

The  person  insured  pays  the  insurance  company  for  entering  into  such  a  contract  a 
certain  sum  of  money  known  as  a  premium. 

The  rate  of  premium  varies  according  to  the  risk  assumed  by  the  insurer. 

Some  of  the  most  common  kinds  of  insurance  are  fire,  theft,  storm,  collision,  fidelity, 
and  employee's  Uability. 

It  is  not  uncommon  for  a  small  corporation  to  carry  life  insurance  upon  the  life  of  the 
person  or  the  persons  responsible  for  the  success  of  the  business.  The  premiums,  in  such 
cases,  are  paid  by  the  corporation. 

Insurance  premiums  are  usually  paid  one  year  in  advance,  except  for  employee's  liability 
insurance  which  is  paid  monthly,  quarterly  or  semi-annually.  In  this  form  of  insurance 
the  premium  is  generally  estimated  as  a  certain  per  cent  of  the  pay  roll. 

PROBLEMS   IN   INSURANCE 

June    1.  William  T.  Mason  paid  $74.62  for  fire  insurance  for  1  year,  policy  dated  June  1. 

15.  The  premium  paid  on  another  policy  dated  June  1,  for  one  year,  amounted  to  $83.12. 
30.  A  refund  of  $4.73  was  received  from  the  company  that  issued  the  first  policy. 

1.  What  was  the  net  amount  paid  for  insurance  during  June? 

2.  Since  these  policies  were  issued  for  one  year,  what  part  of  each  premium  paid  would  represent  the 
insurance  expense  for  June? 

3.  What  is  the  total  amount  of  the  insurance  expense  for  June? 


98  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

INSURANCE  ACCOUNT 

This  is  an  account  kept  to  show  the  amount  of  insurance  premium  paid  during  a  fiscal 
period. 

EXERCISE  LXIII 

Trace,  mentally,  the  items  in  the  following  exercise  to  the  illustrative  Insurance 
account: 

June    1.  The  Insurance  account  on  the  books  of  H.  T.  Barber  &  Co.  showed  a  debit  balance  of  $238.14. 
10.  Paid  premium  on  a  policy  of  fire  insurance,  issued  for  1  yr.,  dated  June  1,  S38.74. 

14.  Received  check  from  Weaver  &  Haskell,  insurance  agents,  on  account  of  the  cancellation  of  a 
poUcy  on  June  1,  amount,  $34.92. 

15.  Paid  insurance  premium  on  policy  on  the  life  of  H.  T.  Barber,  in  favor  of  the  company,  $110.18; 
due  June  15. 

27.  Paid  automobile  insurance  on  a  deUvery  car,  $115.68,  policy  dated  June  20. 

30.  The  credit  of  $32.56  represents  the  amoimt  of  the  expired  premium  for  the  month  of  June. 

INSURANCE 


June 


1 
10 
15 
27 


Unexpired 
Fire 
Life 
Auto 


J 

283 

14 

June 

14 

c 

38 

74 

30 

c 

110 

18 

c 

115 

68 

Refund 
Expired 


QUESTIONS  ON  INSURANCE  ACCOUNT 

1.  What  does  the  total  of  the  debit  side  represent?  2.  What  does  the  total  of  the  credit  side  represent? 
3.  What  does  the  balance  represent?  4.  The  credit  item  of  $32.56  represents  the  amount  of  insurance 
premium  which  expired  during  the  month  of  June.  Estimate  the  expired  premium  to  determine  this  amount. 
5.  What  kind  of  a  balance  should  this  account  always  show?  6.  Under  what  circumstances  might  the 
insurance  account  show  no  balance? 

In  a  large  business  where  a  great  many  policies  are  issued,  it  is  the  practice  to  have 
a  special  book  in  which  to  enter  a  record  of  each  policy. 

In  this  book  the  policies  are  classified  according  to  the  risk  assumed  by  the  insurance 
company  in  each  policy,  say,  one  page  for  each  kind  of  insurance,  such  as,  insurance  on 
buildings,  insurance  on  merchandise  and  ofiice  equipment,  insurance  on  delivery  equip- 
ment, and  employee's  liability  insurance. 

It  is  also  found  convenient  in  a  large  business  to  have  an  insurance  account  for  each 
kind  of  insurance  instead  of  one  account  for  all  kinds  of  insurance. 

Purpose.  To  show  the  amount  of  insurance  premium  paid  or  due  during  a  fiscal 
period. 

Method.  Debit  the  Insurance  account  for  all  premiums  paid  for  insurance  or  for  all 
amounts  due,  but  not  paid,  for  insurance  premiums. 

Credit  Insurance  account  for  any  amounts  received  because  of  cancelled  policies,  or 
because  of  a  reduction  of  premium  rates,  and  for  the  amount  charged  to  Profit  &  Loss 
each  month. 


SOME  ACCOUNTS  WHICH  MAY  CONTAIN  DEFERRED  CHARGES  99 

Result.  The  balance  of  the  insurance  account  represents  the  amount  of  premium 
paid  that  is  chargeable  to  a  future  fiscal  period.  It  is  what  is  commonly  called  a  deferred 
charge. 

BALANCING  AND  RULING  THE  INSURANCE  ACCOUNT 

In  most  instances  this  account  should  be  balanced  and  ruled  at  the  end  of  a  fiscal 
period  as  it  would  be  advisable  to  reduce  to  one  amount  the  cost  of  insurance  in  effect. 
This  would  be  especially  true  if  the  books  were  closed  only  semi-annually  or  annually,  as 
a  great  many  items  would  appear  on  both  the  debit  and  credit  sides  of  the  account. 

Single  and  double  red  lines  should  be  used  in  ruling  this  account,  just  as  in  the  Cash 

account. 

EXPENSES  CLASSIFIED 

The  student  has  already  learned  by  analyzing  the  General  Expense  account  that  it 
is  composed  of  a  number  of  items  in  well  defined  classes,  such  as  charges  for  rent,  salaries, 
telephone  and  telegraph,  postage,  stationery  and  printing,  electric  light,  etc. 

These  classifications  of  expense  may  be  continued  almost  indefinitely  and  in  many 
large  business  houses  there  are  sometimes  a  hundred  or  more  such  accounts,  yet  they  are 
all  similar  in  principle. 

Note. — Because  of  the  great  number  of  expense  accounts  and  because  the  General 
Expense  account  was  illustrated  in  a  previous  chapter,  each  separate  classification  of 
expense  will  not  be  illustrated  in  this  textbook. 

If,  for  any  reason,  it  is  desired  to  show  the  total  amount  spent  for  salaries,  this  can 
be  done  by  opening  a  Salaries  account  and  charging  all  salaries  to  that  account.  The 
same  is  true  of  any  classification  of  expense  mentioned  in  this  chapter;  and  as  a  matter  of 
fact,  many  business  houses  have  found  that  where,  in  the  beginning  of  the  business,  one 
expense  account  was  sufficient,  they  need  to  have  their  expenses  classified  as  they  expand 
the  volume  of  their  business. 

Expense  accounts  are  usually  grouped  according  to  the  department  of  the  business 
which  should  bear  the  expense,  or  according  to  the  purpose  of  the  expense.  Conditions 
peculiar  to  each  business  will  so  affect  this  grouping  that  it  is  impossible  io  do  more,  here, 
than  to  give  a  general  outline,  for  a  mercantile  business,  which  follows: 

General  Expense  Group  Selling  Expense  Group 

Ofl&ce  Salaries  Salaries  of  Salesmen 

Rent  Expenses  of  Salesmen 

Stationery  and  Printing  Advertising 

Miscellaneous  Delivery  Expense 

It  should  be  kept  in  mind  that  each  kind  of  business  has  expense  accounts  peculiar 
to  that  business.  The  expense  accounts  of  a  mercantile  business  would  not  all  be  the 
same  as  the  expense  accounts  of  a  theatre,  a  manufacturing  business,  a  hotel,  a  restaurant, 
a  bakery,  etc.,  though  many  of  these  accounts  would  be  the  same. 

Purpose.  To  show  the  expenses  incurred  chargeable  to  the  particular  classification, 
during  the  period. 

Method.  Debit  each  particular  classification  for  the  expense  incurred  during  the 
period. 

Credit  each  particular  classification-  for  any  amounts  deducted  from  the  charges 
during  the  period. 


100  LYONS'  BOOTCK-REPINO  AND  ACCOUNTING 

Result.  The  balance  of  each  particular  classification  will  show  the  net  amount 
charged  to  that  classification  during  the  period. 

BALANCING  AND  RULING  EXPENSE  ACCOUNTS 

After  these  accounts  are  ''written  down"  to  agree  with  the  inventories,  or  deferred 
charges,  they  are  then  balanced  and  ruled  and  the  balance  brought  down  just  as  is  the 
Cash  account. 

The  inventories  used  in  these  accounts  are  sometimes  referred  to  as  deferred  expenses, 
deferred  charges  to  operations,  or  prepaid  expenses. 

The  balances  remaining  in  these  accounts  should  appear  on  the  Balance  Sheet  as 
assets  under  the  heading  of  Deferred  Charges. 

EXERCISE  LXIV 

To  what  expense  account  given  on  page  99  would  you  charge  each  of  the  following 
items : 

1.  Paid  salary  of  Marcus  Green,  a  salesman,  for  one  month,  $250.00. 

2.  Paid  expense  bill  of  Marcus  Green  for  one  week,  $55.80. 

3.  Bought  gasoline  for  delivery  trucks,  $18.40. 

4.  Paid  garage  rent  for  3  trucks  for  one  month,  $60.00. 

5.  Bought  coal,  $142.60. 

6.  Bought  U.  S.  postage  stamps,  $50.00. 

7.  Received  a  bill  from  McLen  Printing  Co.  for  letterheads,  envelopes,  etc.,  amounting   to  $63.75. 

8.  Paid  Edison  Light  &  Power  Go's,  bill  for  $10.62. 

9.  Paid  salary  of  truck  driver  for  week,  $25.00. 

10.  Paid  rent  for  one  month,  $300.00. 

11.  Paid  Bell  Telephone  Go's,  bill,  $18.74. 

12.  Paid  for  towel  supply  for  office  $2.50. 

13.  Paid  for  space  on  bill  boards  for  3  months  $285.00. 

14.  Paid  for  printing  new  price  lists  $18,75. 

15.  Paid  City  Gas  Go's,  bill  for  gas,  $3.85. 

16.  Paid  salaries  of  bookkeeper  and  stenographer,  $45.00. 

17.  Paid  Hayes  Cartage  Co,  for  delivering  goods  to  customer  $3.15. 

18.  Paid  Mineral  Springs  Water  Co.  for  water  suppUed  to  office  $6.20. 

19.  Paid  for  street  car  tickets  $5.00. 

20.  Paid  for  a  half-page  advertisement  in  a  trade  journal  $75.00. 

HOW  TO  PROVIDE  FOR  THE  DEFERRED  EXPENSE 

At  the  end  of  a  fiscal  period  the  amount  of  the  deferred  items  is  obtained  by  making 
an  inventory  of  the  things  that  were  charged  to  the  various  expense  accounts  but  remain 
unused. 

After  the  total  of  the  deferred  items  for  each  expense  account  has  been  determined, 
the  difference  between  the  balance  of  the  account  and  the  amount  of  the  inventory  is 
charged  to  Profit  &  Loss  account,  by  a  journal  entry. 

Example  I.  On  Dec.  31,  the  Advertising  account  on  the  books  of  the  Star  Cereal 
Co.  showed  a  debit  balance  of  $3000.00.  It  was  estimated  that  advertising  paid  in  advance 
amounted  to  $600.00.  How  shall  the  proper  amount  be  "written  off"  and  the  deferred 
expense  be  "carried  over"? 

It  is  evident  that  if  $3000.00  represents  the  amount  of  advertising  paid  for  and  there 
still  remains  in  effect  $600.00  worth,  that  $2400.00  worth  has  been  used.     Therefore, 
this  amount  ($2400.00)  is  charged  to  Profit  &  Loss  account  by  a  journal  entry  as  follows: 
Profit  &  Loss  *  $2400.00 

Advertising  $2400.00 


SOME  ACCOUNTS  WHICH  MAY  CONTAIN  DEFERRED  CHARGES,     ,,,,,., If^ 

After  the  amounts  of  this  entry  have  been  posted,  the  balance  of  the  Advertising 
account  will  show  the  amount  of  the  inventory,  or  deferred  charge.  Then  by  balancing 
and  ruling  the  account,  it  is  started  anew  at  the  beginning  of  the  next  fiscal  period  with 
the  inventory,  or  deferred  charge,  standing  as  the  first  debit  amount. 

No  definite  rule  can  be  stated  for  determining  the  inventory  for  all  these  accounts; 
in  fact,  many  of  them  might  not  have  an  inventory,  or  deferred  charge.  Experience  and 
good  judgment  must  determine  that  matter. 

EXERCISE  LXV 

In  each  of  the  following  statements  of  fact,  determine  the  amount  to  be  "written  off" 
and  make  the  journal  entry  necessary  to  reduce  the  account  to  agree  with  the  inventory: 

1.  On  Dec.  31,  the  Delivery  Expense  account  on  the  books  of  Hopkins  <Sr  Adams  showed  a  debit 
balance  of  $6287.42.  An  inventory  on  that  date  showed  gasoline,  oils,  etc.,  valued  at  S327.25.  (a)  Deter- 
mine the  net  amount  of  the  Delivery  Expense  account  chargeable  to  the  present  fiscal  period,  (b)  Make 
the  necessary  journal  entry  to  "write  off"  the  expense  for  the  fiscal  period. 

2.  On  June  30,  the  Stationery  &  Printing  account  on  the  books  of  the  Davis  Amusement  Co.  showed 
a  debit  balance  of  $2847.32.  Of  this  amount,  $610.50  was  charged  on  June  27,  but  it  was  for  use  during 
the  coming  fall  season,  (a)  Determine  the  net  amount  of  the  Stationery  &  Printing  account  to  be  charged 
to  Profit  &  Loss  on  June  30.  (b)  Make  the  journal  entry  necessary  to  "write  off"  the  expense  for  the 
fiscal  period. 

3.  On  Dec.  31,  the  Advertising  account  of  the  Holly  Chemical  Co.  showed  a  debit  balance  of  $10,842.90. 
They  had  advertised  extensively  in  magazines  and  on  bill  boards,  and  estimated  tkat  they  had  paid  in 
advance  for  space,  amounting  to  $5,825.00.  (a)  Determine  the  net  amount  of  the  Advertising  account 
chargeable  to  Profit  &  Loss,  (b)  Make  a  journal  entry  that  would  "write  off"  the  proper  amount  of  the 
Advertising  account. 


ACCOUNTS  AFFECTING  PURCHASES  AND   SALES  ACCOUNTS 

DISCOUNTS  FOR  CASH 

Business  houses  have  found  by  experience  that  it  is  a  good  policy  to  allow  a  reduction 
in  the  amount  of  a  bill  to  those  customers  who  pay  their  bills  promptly. 

Therefore,  sales  are  frequently  made  on  "terms",  i.  e.,  terms  is  the  agreement  between 
the  buyer  and  seller  relating  to  the  time  the  bill  is  to  be  paid  and  the  amount  of  the  deduc- 
tion for  prompt  payment. 

The  terms  of  a  sale  are  usually  written  or  printed  on  the  bill  as  follows:  2/10  n/30 
(2%  10  days,  Net  30  days),  which  means  that  if  the  bill  is  paid  within  10  days  of  its  date, 
2%  of  the  bill  may  be  deducted,  or  if  not  paid  within  10  days  no  deduction  will  be  allowed 
but  the  net  amount  of  the  bill  must  be  paid  not  later  than  the  end  of  the  30  day  period  of 
time. 

These  deductions  are  known  as  discounts,  and  since  discounts  are  allowed  on  pur- 
chases they  are  known  as  discounts  on  purchases,  purchase  discounts,  or  discounts  taken. 

The  same  business  may  allow  discounts  on  sales;  therefore,  such  discounts  are  known 
as  discounts  on  sales,  sales  discounts  or  discounts  allowed. 


102 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


PROBLEMS  IN  PURCHASE  DISCOUNTS 

Mar.  21.  The  Wolverine  Saw  Co.  received  a  bill  from  the  Crucible  Steel  Co.  for  $1282.76,  dated  March 
15,  "Terms  2/10  n/30." 

(1)  What  is  the  last  day  on  which  the  Wolverine  Saw  Co.  may  pay  this  bill  and  deduct  the 
discount? 

(2)  When  is  the  bill  due  if  not  paid  in  time  to  deduct  the  discount? 

(3)  What  is  the  amount  of  the  discount  if  paid  in  time  to  deduct  it? 

(4)  What  is  the  amount  of  cash  required  to  pay  the  bill? 

• 

PURCHASE  DISCOUNTS  ACCOUNT 

This  is  an  account  kept  to  show  the  amount  of  discount  deducted  from  bills  for  goods 
purchased. 

EXERCISE  LXVI 

Trace  the  record  of  the  transactions  in  the  following  exercise  to  the  illustrative  account 
with  Purchase  Discounts  on  the  books  of  Benj .  Wells  &  Co : 

Jan.  31.  The  cash  book  shows  that  the  total  amount  deducted  from  bills  paid  was  $141.87. 

Feb.  28.  The  cash  book  shows  deductions  from  bills  for  goods  purchased  amounting  to  $122.14. 

Mar.  18.  An  error  was  reported  to  us  by  Andrews  &  Co.    We  deducted  3%  instead  of  2%;  amount  of 

error,  $3.42. 
Mar.  31.  Deductions  for  discount  on  purchases  amounted  to  $136.12.  , 

PURCHASE  DISCOUNTS 


Mar. 


18 


Andrews  &  Co.    J 


3 

42 

Jan. 
Feb. 
Mar. 

31 

28 
31 

C 

141 

c 

122 

c 

136 

QUESTIONS   ON  PURCHASE  DISCOUNT  ACCOUNT 

1.  What  does  the  credit  side  of  this  account  show?   2.  What  does  the  debit  side  of  this  account  show? 
3.   What  does  the  balance  represent?    4.   Which  side  of  this  account  should  always  be  larger? 


Purpose.  To  show  the  amount  of  discount  deducted  from  bills  for  purchases  made 
by  the  business. 

Method.  Debit  this  account  with  the  amount  of  errors  made  when  too  much  has 
been  deducted  from  the  invoice. 

Credit  this  account  with  the  amount  of  all  discount  deducted  from  purchases. 

Result.  The  balance  will  be  the  net  amount  of  discount  deducted  from  bills  for 
purchases. 

CLOSING  AND  RULING  PURCHASE  DISCOUNTS  ACCOUNT 

This  account  should  not  be  balanced,  as  a  rule,  except  to  forward  it  to  another  page 
At  the  end  of  a  fiscal  period  it  should  be  closed,  but  the  practice  of  bookkeepers  in 
closing  it  is  not  uniform.  Some  close  it  into  the  Profit  &  Loss  account;  while  others 
close  it  into  the  Purchases  account,  because  they  consider  it  as  reducing  the  net  amount 
of  merchandise  purchased.  The  latter  plan  seems  preferable  and  is  used  in  this  book  in 
the  succeeding  sets. 


ACCOUNTS  AFFECTING  PURCHASES  AND  SALES  ACCOUNTS 


103 


This  account  is  ruled  at  the  end  of  a  fiscal  period,  after  closing,  by  single  and  double 
red  lines  like  the  General  Expense  account. 

PROBLEMS  IN  SALES  DISCOUNTS 

Mar.  24.  The  Wolverine  Saw  Co.  received  from  Wilson  Body  Co.  a  check  for  $214.36.  Before  giving  the 
Wilson  Body  Co.  credit  for  this  payment  the  bookkeeper  referred  to  the  Wilson  Body  Co's. 
account  in  the  ledger  and  found  them  charged,  Mar.  15,  with  $218.73.  The  Wolverine  Saw  Co. 
made  all  sales,  "Terms  2/10  n/30." 

How  would  you  account  for  the  difference  between  the  amount  of  tl'.e  charge  and  the  amount  of  the 
check? 

Mar.  24.  The  Wolverine  Saw  Co.  received  a  check  from  the  Central  Mill  &  Lumber  Co.  for  $132.67.  Before 
crediting  the  account  of  the  Central  Mill  &  Lumber  Co.  for  this  check  the  bookkeeper  referred 
to  the  account  of  the  Central  Mill  &  Lumber  Co.  He  noticed  there  was  no  charge,  for  this 
amount,  to  their  account  but  there  were  three  charges  as  foUows:  Feb.  15,  $28.73;  Mar,  2,  $42.94; 
Mar.  12,  $63.12.    All  sales  were  made  "Terms  2/10  n/30." 

L  Did  the  Central  Mill  &  Limiber  Co.  send  the  proper  amount  to  pay  all  bills? 

2.  Did  they  discount  all  their  bills? 

3.  Should  you  determine  if  possible,  before  making  entry,  whether  a  customer  is  paying  certain 
particular  bills  with  the  proper  discount  deducted? 

Mar.  27.  Douglas  &  Lomason,  another  customer  of  the  Wolverine  Saw  Co,,  sent  a  check  for  $112.64. 
The  bookkeeper  for  the  Wolverine  Saw  Co.  in  referring  to  this  account  found  it  charged  on  Apr.  28 
with  $136.82  and  credited  on  Mar.  10  with  $24.18  for  some  saws  that  were  returned.  All  sales 
were  made,  "Terms  2/10  n/30." 

1.  Did  this  check  pay  the  balance  of  the  account? 

2.  Before  making  an  entry,  when  a  remittance  is  received,  what  should  the  bookkeeper  do? 

3.  If  you  could  not  determine  what  particular  bill  or  bills  are  being  paid,  what  would  you  do? 

SALES  DISCOUNTS  ACCOUNT 

This  is  an  account  kept  to  show  the  amount  of  discount  deducted,  by  customers,  from 
sales  on  which  discounts  are  offered. 

EXERCISE  LXVII 

Trace,  mentally,  the  items  in  the  following  exercise  to  the  illustrative  account  with 
Sales  Discount  on  the  books  of  Benj.  Wells  &  Co: 

Jan.  31.  The  cash  book  shows  that  customers  deducted  discount  amounting  to  $237.58. 
Feb.  28.  The  cash  book  footings  for  customers'  deductions  amounted  to  $183.12. 
Mar.  31.  Discounts  deducted  by  customers  amounted  to  $246.83. 

SALES  DISCOUNTS 


Jan. 

31 

C 

237 

58 

Feb. 

28 

C 

183 

12 

Mar. 

31 

C 

246 

83 

104  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

QUESTIONS   ON  SALES  DISCOUNTS  ACCOUNT 

1.  What  does  the  debit  side  of  this  account  show?  2.  What  should  the  credit  side  of  this  account 
show?  3.  What  does  the  balance  of  this  account  show?  4.  Which  side  of  this  account  should  be  larger? 
5.  If  a  customer  never  discounted  a  bill,  when  terms  of  discount  were  offered,  what  would  seem  to  be 
wrong? 

Purpose.  The  purpose  of  the  Sales  Discount  account  is  to  show  the  net  amount 
that  customers  deduct  from  bills  because  of  payment  within  the  time  allowed  for  discount. 

Method.  Debit  this  account  for  all  deductions  for  discount  in  accordance  with  the 
terms  of  the  sales. 

Credit  this  account  for  errors  made  by  customers  in  taking  discounts  to  which  they 
are  not  entitled. 

Result:  The  balance  of  this  account  should  show  the  net  amount  of  discounts  taken 
by  customers. 

CLOSING  AND  RULING  SALES  DISCOUNTS  ACCOUNT 

This  account  should  not  be  balanced  unless  it  is  desired  to  forward  it  to  another 
page. 

At  the  end  of  a  fiscal  period  it  is  closed.  Some  bookkeepers  close  it  into  the  Profit 
&  Loss  account,  while  others  close  it  into  the  Sales  account  and  thereby  show  it  as  a 
deduction  from  the  net  sales.  The  latter  method  seems  preferable  and  is  used  in  the 
succeeding  sets  of  this  book. 

When  closed,  this  account  is  ruled  with  single  and  double  red  lines  the  same  as  the 
General  Expense  account. 


FREIGHT-OUT  ACCOUNT 

This  account  is  kept  when  it  is  desired  to  show,  as  a  separate  amount,  the  total  expendi- 
ture for  freight  on  goods  delivered  to  customers. 

In  the  beginning  chapters  of  this  book  the  freight  paid  on  sales  was  charged  to  the 
Merchandise  Sales  account,  which  reduced  the  net  amount  of  sales.  This  method  of 
handling  freight-out  is  followed  by  many  small  business  houses,  but  among  the  larger 
establishments  it  is  the  practice  to  have  a  separate  account  for  Freight-Out. 

Goods  are  sometimes  sold  f.  o.  b.  (free  on  board)  destination.  This  means  that  the 
seller  is  to  deliver  the  goods  to  their  destination,  (the  place  to  which  the  goods  are  shipped) 
free  of  all  freight  charges.  For  example:  A.  of  Chicago  sells  goods  to  B.  of  Omaha  f.  o.  b. 
destination.  This  means  that  A  must  pay  all  freight  charges  on  the  goods  for  delivering 
them  in  Omaha,  and  that  all  B  has  to  do  is  call  at  the  office  of  the  railroad  company  and 
claim  the  goods. 

Sometimes,  the  terms  of  sale  are  expressed  as,  f .  o.  b.  cars,  f.  o.  b.  warehouse,  or  f .  o.  b. 
point  of  shipment;  and  while  these  terms  are  technically  different,  they  all  mean  that  the 
one  buying  the  goods  must  pay  the  freight  on  them. 

It  is  necessary  for  the  bookkeeper  to  be  familiar  with  these  terms  and  the  customs 
of  the  house  by  which  he  is  employed  in  order  to  make  the  proper  entry  for  freight  and 
other  transportation  charges.  In  the  larger  business  houses  where  a  purchasing  agent  is 
employed,  it  is  his  duty  to  make  agreements  in  reference  to  these  charges. 


ACCOUNTS  AFFECTING  PURCHASES  AND  SALES  ACCOUNTS  105 

Sometimes  the  seller  pays  the  transportation  charge  and  includes  the  amount  of  it 
in  the  bill  sent  to  the  purchaser. 

The  Freight-Out  account  is  so  similar  in  principle  to  many  of  the  other  accounts 
treated  in  previous  chapters  in  this  book  that  it  is  not  necessary  to  illustrate  it  here. 

Purpose.    To  show  the  net  cost  of  transportation  for  delivering  goods  sold. 

Method.  Debit  the  Freight-Out  account  for  all  amounts  paid  for  freight  or  express 
charges  in  delivering  goods. 

Credit  the  Freight-Out  account  for  all  rebates  for  over-charges  of  freight  and  express, 
also  for  refunds  of  freight  and  express  made  by  our  customers. 

Result.  The  balance  of  this  account  should  show  the  net  cost  of  transportation  of 
goods  sold. 

QUESTIONS  ON  FREIGHT-OUT  ACCOUNT 

1.  What  should  the  debit  side  of  this  account  show?  2,  What  should  the  credit  side  of  this  account 
show?  3.  What  should  the  balance  of  this  account  show?  4.  What  kind  of  a  balance  should  it  show? 
5.  Why  may  it  be  regarded  as  reducing  the  amount  of  sales?  6.  Why  may  it  be  regarded  as  a  selling 
expense? 

CLOSING   AND  RULING   FREIGHT-OUT   ACCOUNT 

There  is  no  need  to  balance  this  account  except  to  forward  it  to  another  page  of  the 
ledger. 

At  the  end  of  a  fiscal  period  it  should  be  closed  into  the  Sales  account  or  into  the 
Profit  &  Loss  account.  The  practice  of  bookkeepers  in  this  respect  is  not  uniform,  but 
it  would  seem  to  be  more  logical  to  consider  the  freight-out  as  reducing  the  amount  of 
sales.  In  the  preparation  of  the  Profit  and  Loss  Statement,  if  not  shown  as  affecting 
the  Sales  account,  it  should  be  classed  as  an  expense  and  should  be  included  in  the  Selling 
Expense  group  of  accounts.  When  the  account  is  closed  it  should  be  ruled  with  single  and 
double  red  lines  like  the  General  Expense  account. 

FREIGHT-IN  ACCOUNT 

Sometimes  it  is  desirable  to  know  the  total  amount  of  freight,  as  a  separate  item, 
that  is  paid  on  merchandise  purchased.  This  can  be  accomplished  by  a  Freight-In  account 
properly  kept. 

The  freight  paid  on  purchases  has  been  treated,  in  the  early  chapters  of  this  book,  as 
a  proper  charge  to  the  Merchandise  Purchases  account.  When  this  method  of  treatment 
is  not  used,  but  a  separate  account  is  kept  for  Freight-In,  it  should  be  regarded  as  an 
expense  account  and  treated  in  the  same  maimer  as  any  other  expense  account.  For 
this  reason,  it  has  not  been  thought  necessary  to  illustrate  it  in  this  textbook. 

Purpose.    To  show  the  total  amount  paid  for  freight  on  merchandise  purchased. 

Method.     Debit  this  account  for  all  payments  of  freight  on  merchandise  purchased. 

Credit  this  account  for  all  allowances  on  account  of  over-charges  on  freight  bills. 

Result.  The  balance  of  this  account  will  show  the  net  cost  of  freight  on  merchandise 
purchased. 

CLOSING  AND  RULING  FREIGHT-IN  ACCOUNT 

It  is  not  necessary  to  balance  this  account  except  to  carry  it  forward. 

At  the  end  of  a  fiscal  period  it  is  closed  into  the  Purchases  account  in  order  to  show 
the  total  net  purchases  of  merchandise.  But,  some  bookkeepers  close  it  into  the  Profit 
&  Loss  account  and  also  show  it  on  the  Profit  and  Loss  Statement. 


106  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

In  this  book  it  is  closed  into  the  Purchases  account  as  that  seems  to  be  the  logical 
method  of  disposing  of  it. 

After  closing,  it  is  ruled  with  single  and  double  red  lines  the  same  as  the  General 
Expense  account. 

SALES  REBATES  AND  ALLOWANCES  ACCOUNT 

This  is  an  account  kept  to  show  the  allowances,  other  than  discounts,  made  to  customers 
during  a  fiscal  period. 

As  the  Sales,  Rebates  and  Allowances  account  is  really  a  part  of  the  Sales  account 
it  will  not  be  illustrated  here. 

Purpose.  The  purpose  of  this  account  is  to  show  the  deductions  made  from  cus- 
tomers' accounts  due  to  errors  in  billing,  filling  orders,  and  other  causes. 

Method.  Debit  this  account  for  all  allowances  and  deductions  made  from  customers' 
accounts  due  to  errors. 

Credit  this  account  only  for  errors  made  in  debiting  the  wrong  account. 

Result.  The  balance  of  this  account  should  show  the  net  amount  deducted  from 
customers'  accounts  due  to  errors. 

As  a  general  rule  it  should  never  be  necessary  to  keep  this  account.  If  the  account 
is  large  it  indicates  the  business  is  not  giving  proper  service  to  its  customers,  or  that  the 
various  departments  of  the  business  are  not  properly  conducted. 

However,  there  are  certain  kinds  of  business  where  such  an  account  is  a  necessary 
part  of  the  accounting  system. 

CLOSING  AND  RULING  SALES  REBATES  AND  ALLOWANCES  ACCOUNT 

This  account  is  not  balanced  unless  it  is  desired  to  forward  it  to  another  page. 

It  is  closed,  at  the  end  of  a  fiscal  period,  into  the  Sales  account  in  order  to  determine 
the  net  sales  of  merchandise. 

It  is  ruled,  after  being  closed,  with  single  and  double  red  lines  the  same  as  the  General 
Expense  account. 

PURCHASES,   REBATES  AND  ALLOWANCES  ACCOUNT 

This  account  is  kept  to  show  during  the  fiscal  period  the  allowances,  other  than  dis- 
counts, made  by  the  persons,  firms  or  corporations  from  which  goods  are  purchased. 

These  allowances  may  be  caused  by  the  goods  being  defective  in  quality  or  damaged 
in  transportation,  by  errors  in  billing,  etc. 

This  account  is  really  a  part  of  the  Purchases  account  and,  therefore,  will  not  be 
illustrated  here. 

Purpose.  The  purpose  of  the  Rebates  and  Allowances  on  Purchases  account  is  to 
show  the  deductions  allowed  from  the  invoices  for  goods  purchased. 

Method.    Debit  this  account  only  for  errors  made  in  crediting  it  for  the  wrong  amounts. 

Credit  this  account  for  all  allowances  and  deductions,  due  to  errors,  made  from  invoices 
for  merchandise  purchased. 

Result.  The  balance  should  show  the  net  amount  deducted  from  the  invoices  for 
merchandise  purchased. 


SET  IV— RETAIL  PIANO  BUSINESS— TWO  MONTHS  107 

CLOSING   AND  RULING  PURCHASES  REBATES  AND  ALLOWANCES  ACCOUNT 

There  is  no  need  to  balance  this  account  except  to  forward  it  to  another  page.  At 
the  end  of  a  fiscal  period  it  is  closed  into  the  Purchases  account  to  determine  the  net  pur- 
chases for  the  period. 

After  it  is  closed  it  is  ruled  with  single  and  double  red  lines  like  the  General  Expense 
account. 

SET  IV  — RETAIL  PIANO  BUSINESS  — TWO   MONTHS 

This  set  may  be  studied  either  with  or  without  the  business  papers;  but  if  the  papers 
are  used,  you  as  bookkeeper,  will  prepare  all  outgoing  papers  such  as  bills,  checks,  notes 
and  monthly  statements  to  customers,  you  will  also  prepare  all  notes  receivable  ready  for 
the  signature  of  the  customer,  but  you  will  not  prepare  incoming  invoices  or  incoming 
checks,  neither  will  these  papers  be  furnished  in  the  outfits. 

There  are  manufacturers  who  will  place  on  their  pianos  any  name  desired  by  the 
dealer.  These  pianos  are  known  in  the  trade  as  "stenciled"  pianos.  This  practice  is  not 
uncommon  in  other  lines  of  business  as  well. 

W.  H.  Watkins  is  a  dealer  in  pianos.  He  has  a  "going"  business  and,  in  anticipation  of 
its  increase,  has  leased  and  moved  into  a  new  store  at  364  Wabash  Ave.  He  has  decided 
to  open  a  new  set  of  books  and  for  this  purpose  has  furnished  the  following  information 
concerning  his  affairs  on  May  1,  19 — : 

Assets 

Cash  (Now  in  Merchants  Exchange  Bank.)  $3254.90 

Notes  Receivable: 

Wm.  A.  Hunt— dated  Apr.  20—30  da.,  interest  at  6%  250.00 

B.  P.  Taylors-dated  Apr.  5—30  da.,  interest  at  6%  475.00 
Accounts  Receivable: 

C.  H.  Banks,  482  Yale  Ave.  (Sale  made  Mar.  24)  125.00 
T.  F.  Robson,  286  Maple  St.  (Sale  made  Apr.  26)  350.00 
E.  R.  Simmons,  857  Park  Ave.  (Sale  made  Apr.  10)  190.00 

Mdse.  Inventory  4282.50 

Office  Equipment  227.85 

Liabilities 

Accounts  Payable: 

Michigan  Bench  Co.,  Michigan  City,  Ind.  238.75 

Piano  Products  Co.,  Maywood,  111.  846.50 

Take  from  the  pad  of  note  forms  two  blanks,  and  fill  them  out  to  correspond  with  the  information 
given  concerning  these  notes.  Have  them  approved  and  signed  by  the  teacher,  with  the  name  of  the  maker 
in  each  case.    Then  file  them  in  the  envelope  marked,  "Office  Safe." 

Make  an  opening  entry  to  record  the  above  assets  and  habihties,  but  before  posting  the  amounts 
of  the  entry  study  the  following  instructions  which  show  the  accounts  necessary  for  this  set,  and  the  page 
of  the  ledger  on  which  these  accounts  should  begin. 

Begin  this  ledger  on  page  16  and  use  pages  16,  17  and  18  for  Cash  and  customers'  accounts  (6  accounts 
to  each  page);  all  other  accounts  may  be  opened  four  accounts  to  a  page,  except  General  Expense  and 
Selling  Expense  which  require  one-half  page  for  each  account.  The  following  is  the  order  in  which  the 
accounts  should  appear  in  the  ledger:  Cash,  Accounts  Receivable,  Notes  Receivable,  Mdse.  Inventory, 
Office  Equipment,  Delivery  Equipment,  Excelsior  Piano  Co.,  Maynard  Sales  Co.,  Michigan  Bench  Co., 
Piano  Products  Co.,  Notes  Payable,  W.  H.  Watkins,  Proprietor,  W.  H.  Watkins,  Personal,  Sales,  Purchases, 
General  Expense,  Selling  Expense,  Insurance,  Interest,  Freight-In,  Freight-Out,  Discount  on  Purchases, 
Discount  on  Sales,  Sales  Rebates  and  Allowances,  Profit  &  Loss. 


108 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


PRICE  LISTS 

The  following  price  lists  may  be  used  in  this  set  for  credit  sales,  except  when  other- 
wise directed,  but  not  for  cash  sales: 


1 

2 

3 

4 

5 

0 

7 

8 

9 

10 

Watkins  Pianos 

$310 

$315 

$320 

$330 

$335 

$340 

$312 

$322 

$318 

$328 

Watkins  Player  Pianos 

670 

675 

680 

685 

690 

695 

672 

682 

648 

658 

Benches 

15 

14 

12 

13 

11 

10 

9 

10.50 

12.50 

9.50 

These  price  lists,  when  assigned  to  students,  should  not  be  used  in  certain  transactions. 
These  transactions  are  indicated  by  instructions  not  to  use  the  price  lists. 


May  1. 


MEMORANDA  OF  TRANSACTIONS  FOR  MAY 

Gave  a  check  for  $125.00  to  Wilson  &  Co.  for  the  rent  of  the  store  for  the  month 
of  May. 


CHECK  STUB 


Balance  May  1,  19 — 


No.. 


BB.te—MmI 19- 


To- 


Wilson  &  Co. 


p  _        Rent  for  May 


Amt.  $- 


125.00 


3254 


90 


No.. 


Date. 


.19- 


To- 


For^ 


Amt.  $- 


125 


3129 


00 


90 


Enter  on  the  stub  of  the  check  book,  the  amount  of  the 
bank  balance  on  May  1,  like  the  illustration. 

In  writing  a  check  which  has  a  stub,  it  is  advisable  to  fill 
out  the  stub  first,  and  then  fill  out  the  check  form.  If  this 
practice  is  closely  followed,  it  will  prevent  a  check  getting 
into  circulation  without  a  record  of  it  being  made. 

Select  a  form  of  signature  and  never  use  any  other  form. 
Banks  require  each  depositor  to  make  a  record  of  his  signatm-e 
in  the  form  he  intends  to  use  when  signing  checks.  For 
this  reason,  one  form  of  signature  should  be  adopted  and 
should  be  strictly  adhered  to. 

Take,  from  the  outfit,  the  check  book  and  write  a  check 
payable  to  Wilson  &  Co.  for  the  amount  of  the  rent.  Sign 
the  check  "W.  H.  Watkins,  per  (your  name)".  Place  the 
check  after  having  it  O.  K.'d  by  the  teacher,  in  the  envelope 
marked  "Outgoing  Papers".  Follow  the  form  of  the  check 
shown  on  page  36. 

May  2.  Bought  a  delivery  truck  of  the  Maynard 
Sales  Co.  for  $2150.00;  terms,  $650  cash, 
balance  in  three  equal  notes  ($500.00  each). 
The  first  note  due  in  30  da. ;  the  second,  in  60 
da.;  the  third,  in  90  da. 


Write  the  check  and  the  notes.    After  they  are  approved 
by  the  teacher  place  the"m  in  the  envelope  marked  "Outgoing 
Papers". 
—  First,  enter  the  amount  of  the  purchase  in  the  journal; 

second,  enter  the  cash  in  the  cash  book,  charging  the  Majoiard  Sales  Co.;  third,  enter  the  notes  separately 
in  the  journal,  charging  the  Maynard  Sales  Co.  for  the  total. 


SET  IV— RETAIL  PIANO  BUSINESS— TWO  MONTHS 


109 


May  3.  Sold  Mrs.  H.  S.  James,  354  Adams  Ave.,  one  Watkins  Piano  @  $355.00, 1  Bench 
(^  $10.00;  terms,  $250  cash,  balance  within  90  days. 


DEPOSIT  TICKET 


DepoBited  with  the 


Merchants  Exchange  Bank 

/  Fat  Aeooaotof 


^y^'^^a^^  . 


i-I9- 


Take  a  blank  from  the  pad  of  bill  heads  and  make  out  a  bill  for  this  sale  and  have  it  approved  by  the 
teacher.  Study  the  form  of  bill  given  on  page  20.  The  bill  should  show  the  amount  of  the  cash  payment 
made  at  the  time  of  the  sale.  Therefore,  wTite  on  the  first  space  below  the  last  item  of  the  bill,  the  following: 
"Credit  by  Cash"  and  extend  the  amount  of  the  payment  into  the  second  amount  column  of  the  bill,  just 
under  the  total,  and  deduct  the  amount  of  the  payment  from  the  amount  of  the  bill.  The  difference  will 
be  the  balance  due  on  the  bill. 

Enter  the  full  amount  of  the  sale  ($365.00)  in  the  sales  book,  charging  the  personal  account,  and  then 
make  an  entry  in  the  cash  book  for  the  check  received  for  the  cash  payment,  crediting  the  personal  account 
for  the  amount  of  it. 

The  student  should  remember  that  the  illustration 
of  a  deposit  ticket  which  is  given  here  is  the  form  gen- 
erally used  in  making  a  deposit  for  a  commercial 
account.  This  form  differs  from  the  deposit  ticket 
generally  used  when  a  deposit  is  made  for  a  savings 
account.  A  commercial  account  is  one  on  which 
money  is  always  drawn  by  the  use  of  a  check,  and  a 
savings  account  is  one  on  which  money  is  drawn  by 
means  of  a  receipt  that  is  used  in  connection  with  a 
bank  book. 

A  person  who  has  a  savings  account  should  never 
attempt  to  draw  money  on  such  an  account  by  a 
check, — checks  are  used  only  in  connection  with  a 
commercial  account. 

When  a  sum  of  money  is  drawn  on  a  savings  account, 
it  is  the  custom  of  most  banks  to  make,  immediately,  an 
entry  on  the  depositor's  bank  book,  showing  the 
amount  withdrawn  and  the  balance,  if  any,  on  deposit. 
This  is  not  done  when  a  check  is  drawn  against  a  com- 
mercial account;  instead,  a  bank  will  pay  all  checks 
(as  they  are  presented  to  the  bank)  against  a  depositor's 
account  until  one  of  the  checks  drawTi  is  greater  than 
the  balance  of  the  account;  in  this  event,  a  check  that 
overdraws  an  account  will  not  be  paid  by  the  bank. 

In  many  states  banks  are  forbidden  by  law  to  pay 
checks  that  overdraw  a  depositor's  account. 

A  deposit  should  now  be  made  for  the  amount  of  the  check  received  in  this  transaction.  Among  the 
business  forms  in  the  outfit  is  a  pad  of  deposit  tickets.  Take  one  of  these  blanks  and  fill  out  the  necessary 
information  on  it.  Take  the  deposit  ticket  together  with  the  bank  pass  book  to  the  teacher  and  have 
the  amount  of  the  deposit  entered  in  the  pass  book.  The  pass  book  will  be  found  among  the  supplies  in 
the  outfit.  Make  no  entry,  in  the  books  of  original  entry  or  in  the  ledger,  for  the  deposit,  but  enter  the 
amount  of  the  deposit  and  the  date  of  it  on  the  check  book  stub.  Add  the  amount  of  the  deposit  to  the 
last  balance;  the  total  will  then  be  the  new  balance. 


Cincncy. 


O^,- 


OM'. 


>~S-o 


May  4.  Received  from  T.  F.  Robson,  a  check  for  $343.00,  in  payment  of  the  balance  due. 
There  was  a  $7.00  discount  on  this  account. 


Make  an  entry  in  the  cash  book  for  the  amount  of  cash  received  ($343.00),  then  make  an  entry  in 
the  journal  for  the  amount  of  the  discount,  charging  Discount  on  Sales  account  and  crediting  the  personal 
account. 

All  similar  transactions  are  entered  in  this  same  manner. 


110  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

May  4.  Paid  Michigan  Bench  Go's,  account,  check  $233.97,  discount  $4.78. 

Write  the  check,  make  an  entry  in  the  cash  book  for  the  amount  of  it  ($233.97),  then  make  a  journal 
entry,  charging  the  personal  account  and  crediting  Discount  on  Purchases  account. 
All  similar  transactions  are  entered  in  this  same  manner. 

May  5.  Received  from  B.  P.  Taylor,  a  check  in  payment  of  note  due  today,  $475.00, 
interest  $2.38;  amount  of  the  check  $477.38. 

Take  from  the  office  safe  the  note  signed  by  B.  P.  Taylor  and  receipt  it  by  writing  across  the  face 
of  the  note  the  following,  "Paid  May  5,  19 —  W.  H.  Watkins  per  (your  name)".  Then  deliver  the  note 
to  the  teacher.    Proceed  in  the  same  manner  with  other  notes  receivable  when  paid. 

Prepare  a  deposit  ticket,  include  the  checks  received  on  the  4th  and  5th.  Proceed  with  this  deposit 
as  you  did  with  the  other  deposit.    All  deposits  are  made  in  a  similar  manner. 

May  5.  Paid  by  checks:  Edison  Light  and  Power  Co.,  $13.85;  City  Gas  Co.,  $4.37;  Bell 
Telephone  Co.,  $7.80. 

Write  the  checks  and  after  having  them  approved  place  them  in  the  "Outgoing  Papers"  envelope. 
Proceed  in  the  same  manner,  in  all  future  transactions,  when  checks  are  issued. 

May  7.  Paid  the  Evening  News,  by  check,  for  advertising  $36.50. 

7.  Bought,  by  check,  a  check  writer  of  the  Wilkins  Office  Supply  Co.  for  $45.00. 

8.  Sold  the  Arlington  Hotel  3  Watkins  Pianos  @  $325,  3  Benches  @  $12.00;  terms 
$500  cash,  balance  30  days. 

(Do  not  use  the  variable  price  lists  for  this  transaction.)  The  words  "cash"  and  "check"  frequently 
mean  the  same  and,  in  this  set,  they  are  interchangeable  terms.    This  is  likewise  true  in  business. 

May  8.  Paid  balance  due  the  Piano  Products  Co.  on  May  1,  less  2%  discount;  discount 
$17.93,  check  $828.57. 

9.  Paid  the  Clayton  Advertising  Co.,  by  check,  for  advertising  space  on  bill  boards, 
6  months  in  advance  from  May  1,  $300.00. 

10.  Received  bill  from  the  Piano  Products  Co.,  dated  May  5,  for  $1248.75;  terms 
2/10,  n/30. 

11.  Sold  B.  M.  Anderson,  1418  Kenmore  Ave.,  1  Watkins  Player  Piano  @  $675.00, 
1  Bench  @,  $15.00;  terms,  cash  $340,  balance  $50  per  month  until  paid. 

Deposit  the  checks  received  on  May  8th  and  11th. 

May  12.  Paid  freight  on  the  shipment  of  pianos,  billed  May  5,  $47.68. 
Make  the  check  payable  to  a  railroad  company  in  your  own  town  or  city. 

May  14.  Sold  the  Board  of  Education,  50  Broadway,  2  Watkins  Pianos  ©  $300;  terms 
cash.     Charge  this  the  same  as  any  other  sale.    Watkins  has  agreed  to  wait  a 
few  weeks  for  new  appropriations  for  the  money. 
15.  Paid  salaries  by  checks  as  follows:  S.  N.  Monroe,  salesman,  $75.00;  (yourself), 
bookkeeper,  $60.00;  Roy  Thomas,  truck  driver,  $50.00. 


SET  IV— RETAIL  PIANO  BUSINESS— TWO  MONTHS  111 

May  15.  W.  H.  Watkins  drew  $100.00  by  check. 

16.  Sold  Dreamland  Amusement  Co.,  756  Lincoln  Bldg.,  1  Watkins  Piano  $325, 
1  Bench  $15.00;  terms  2/10,  n/30. 

(Do  not  use  variable  price  lists  for  this  sale.)     This  piano  is  to  be  delivered  by  Watkins  f.  o.  b.  Lake- 
side Park. 

May  17.  Paid  freight  on  piano  and  bench  shipped  to  the  Dreamland  Amusement  Co., 
$5.74. 

Make  this  check  payable  to  a  local  railroad  company. 
May  18.  Received  cash  from  C.  M.  Banks,  $125.00. 

A  RECEIPT 


(Z^^^^^^.  IM,  <^^y  z  ^0~  ■ 


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Z^^^^i^c^^^i-t:^^.^  K ' 


C^><^"^'"^-^'g2>«^^<«g'^^-^<^'<?-^>^ 


L^-^ 


Write  a  receipt  in  favor  of  C.  M.  Banks  for  the  amount  paid  by  him.  In  writing  the  receipt  follow  the 
form  which  is  shown  by  the  illustration.  Always  issue  a  receipt  when  you  receive  money  on  account. 
However,  if  you  receive  a  check,  it  is  not  necessary  to  issue  a  receipt  as  the  cancelled  check  becomes  a 
valid  receipt. 

May  19.  Sold  Charles  B.  Barrett,  1285  Kenwood  Ave.,  1  Watkins  Piano  @  $330.00, 
1  Bench  @  $15.00;  terms  $200  cash,  balance  note  at  60  days,  interest  at  6%. 

Write  the  bill  and  note. 

May  21.  Received  a  check  for  $251.25  from  Wm.  A.  Hunt  for  note  due  today;  amount  of 
note  $250.00,  interest  $1.25. 

Deposit  all  checks  on  hand. 

May  22.  Received  bill  from  Excelsior  Piano  Co.,  New  York,  N.  Y.,  for  $1151.25,  dated 
May  18,  terms  2/10,  n/30. 


112  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

May  23.  Sold  the  Strand  Theatre  Co.,  220  Washington  Ave.,  1  Watkins  Piano  $380.00; 
terms  2/10,  n/30. 

(Do  not  use  variable  price  lists  for  this  sale.) 

24.  Received  a  check  from  Wilkins  Office  Supply  Co.  for  $10  for  use  of  the  truck 
(credit  Selling  Expense). 

25.  Bought  by  check  a  cabinet  safe  of  the  Wilkins  Office  Supply  Co.,  for  office,  $85.00. 

26.  Paid  freight  on  shipment  of  pianos  received  from  Excelsior  Pianos  Co.,  $61.83. 

Make  this  check  payable  to  a  local  railroad  company. 

May  26.  Received  cash  from  Dreamland  Amusement  Co.,  $333.20,  discount  $6.80. 
28.  Sold  for  cash  to  Mrs.  J.  W.  Fowler,  1  Bench,  $12.00. 

Make  a  bill  for  this  sale  the  same  as  for  a  credit  sale.    Then  receipt  the  bill  in  the  same  form  as  you 
receipted  the  note  paid  on  May  5.    Deliver  the  receipted  bill  to  the  teacher. 
Deposit  all  checks  on  hand. 

May  29.  Paid  the  Standard  Garage,  by  check,  for  gasoline  and  oil  $22.70. 

30.  Sold  the  First  Baptist  Church,  938  Maple  St.,  1  Watkins  Piano  $340,  1  Bench 
$12,00;  terms  $150.00  cash,  balance  $25.00  per  month  until  paid. 

Deposit  the  check  received  from  the  First  Baptist  Church. 

May  31.  Paid  salaries  by  checks  as  follows:  S.  N.  Monroe,  salesman,  $75.00;  (yourself), 
bookkeeper,  $60.00;  Roy  Thomas,  truck  driver,  $50.00. 

May  31.  W.  H.  Watkins  has  decided  to  allow  himself  a  monthly  salary  of  $250.00.  It  is 
estimated  by  Watkins  that  he  spends  about  half  his  time  in  selling  goods  and  the 
other  half  in  the  management  of  the  business.  Therefore,  make  the  necessary 
journal  entry,  charging  one  half  of  Watkins'  salary  to  Selling  Expense  and  one 
half  to  General  Expense,  crediting  his  personal  account  for  the  amount  of  his 
salary. 

PROGRAM   FOR   CLOSING 

1.  Post  and  take  a  trial  balance. 

2.  Close  and  rule  the  special  books  of  original  entry. 

The  ledger  for  this  month  will  not  be  closed  but  will  be  continued  for  another  month 
before  closing. 

3.  Reconcile  the  bank  balance. 

After  obtaining  a  trial  balance,  it  is  the  usual  practice  of  a  bookkeeper  to  reconcile 
the  bank  balance,  as  shown  by  the  bank,  with  the  balance  as  shown  by  the  cash  book. 
Most  banks  prepare  monthly  statements  and  send  these  statements,  together  with  all 
cancelled  checks,  to  the  depositors. 

The  depositor,  for  his  own  benefit,  should  make  it  a  regular  practice  to  reconcile 
his  bank  account  at  least  once  each  month.  The  reconciliation  should  not  be  delayed  after 
the  cancelled  checks  are  returned.  Promptness  may  discover  a  forged  or  a  "raised"  check 
before  it  is  too  late  to  take  appropriate  action,  or  it  may  save  a  great  amount  of  labor  in 
detecting  an  error  at  the  bank  or  in  the  depositor's  own  records. 


f^ET  IV— RETAIL  PIANO  BUSINESS— TWO  MONTHS  113 

In  the  outfit  of  forms  is  a  bank  statement.  Check  this  statement  with  the  "paid 
side"  of  the  cash  book  to  determine  which  check  or  checks  have  not  been  returned  by  the 
bank.  The  difference  between  the  balance,  shown  by  the  bank,  and  the  balance  shown  by 
the  cash  book  should  equal  the  amount  of  the  check  or  checks  not  returned  by  the  bank. 

After  the  reconciliation  has  been  completed  a  record  of  it  should  be  made  so  that  it 
may  be  preserved  for  future  use.  Some  bookkeepers  use  printed  forms  for  recording  the 
reconciliations  while  others  record  them  in  one  of  the  books  of  original  entry,  preferably 
the  cash  book,  upon  the  page  on  which  the  cash  book  is  balanced. 

The  following  is  suggested  as  a  good  form  to  follow  in  making  a  reconciliation  with 
the  bank: 

Reconciliation 

Balance  shown  by  bank  $1262,37 

Balance  shown  by  cash  book  1186.45 


Difference  $    75.92 

Outstanding  checks. 

No.  286  $15.00 

No.  294  41.17 

No.  306  19.75  75.92 

Record  the  reconciliation  for  the  month  of  May  on  the  "Cash  Received"  side  of  the  cash 
book. 

4.  Prepare  a  monthly  statement  for  each  customer  whose  account  is  not  closed. 

A  part  of  the  regular  routine  of  bookkeeping  is  the  making  of  monthly  statements 
to  customers.  Many  business  houses  insist  upon  mailing  statements  to  their  customers 
not  later  than  the  first  day  of  the  month  following  the  month  for  which  the  statement 
was  made,  i.  e.,  on  June  1  a  statement,  covering  transactions  for  May,  must  be  mailed 
to  each  and  every  customer  whose  account  has  not  been  paid  in  full.  Various  plans  have 
been  devised  for  preparing  these  statements  as  the  business  for  the  month  proceeds. 

In  the  outfit  of  forms  is  a  pad  of  statement  blanks.  For  a  model  statement  turn  to 
page  22.      Have  each  statement  approved  by  the  teacher. 

Many  bookkeepers,  to  be  certain  that  the  statements  of  account  are  correct  as  mailed 
to  customers,  total  the  balances  of  the  statements,  and  this  total  should  agree  with  the 
total  of  the  customers'  accounts  receivable  on  the  same  date. 

SET   IV  CONTINUED 

MEMORANDA  OF  TRANSACTIONS  FOR  JUNE 

June  1.  Received  bill  from  the  Excelsior  Piano  Co.,  dated  May  28,  for  $1354.75;  terms 
2/10,  n/30. 

1.  Gave  check  to  Wilson  &  Co.  for  rent  for  June,  $125.00. 

2.  Paid,  by  check,  the  note  due  today  in  favor  of  Maynard  Sales  Co. ;  amount  of  note 
$500.00,  interest  $2.50. 

Write  the  check  for  $502.50.  Take  the  note  from  the  file  and  have  it  receipted  by  the  teacher  for  the 
Maynard  Sales  Co.,  after  which  it  should  be  filed  in  the  office  safe.  Notes,  when  paid,  should  be  filed 
for  future  reference.    It  is  not  considered  good  practice  to  destroy  them  immediately  after  payment. 


114  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

June  4.  Paid  Piano  Products  Co.  bill  of  May  5;  check  $1223.77,  discount  $24.98. 

5.  Sold  Loewe  Theatre  Co.,  City,  5  Watkins  Pianos  @  $330.00;  terms  2/10,  n/30, 
and  accepted  in  part  payment  5  old  pianos  @  $50.00  each. 

(Do  not  use  the  price  lists  for  this  sale.)  Enter  the  sale  as  usual,  then  make  an  entry  in  the  journal 
charging,  Purchases  account,  and  crediting  Loewe  Theatre  Co.  for  the  used  pianos. 

June  6.  Paid,  by  check,  the  freight  on  four  of  the  pianos,  sold  to  Loewe  Theatre  Co., 
which  were  to  be  delivered  f.  o.  b.  to  different  theatres  of  the  Loewe  circuit,  by 
Watkins;  amount  of  the  freight  $34.86. 

Make  the  check  payable  to  a  local  railroad  company. 

This  kind  of  a  transaction  is  common  in  business  as  one  theatre  company  may  own  and  operate 
several  theatres,  or  one  hotel  company,  several  hotels,  etc.  In  such  cases,  most  of  the  buying  is  done 
at  the  main  office,  frequently,  by  a  purchasing  agent. 

June  7.  Gave  check  for  the  freight  on  pianos  received  from  the  Excelsior  Piano  Co.,  $63.28. 
Billed  May  28. 

Make  this  check  payable  to  a  local  railroad  company. 

June  8.  Gave  the  Lane  Furniture  Co.  a  check  for  repairing  a  defective  bench  bought  of 
the  Michigan  Bench  Co.  Charge  the  Michigan  Bench  Co.  for  the  amount,  $2.75, 
as  they  have  authorized  the  repairs. 

This  kind  of  a  transaction  is  not  unusual  in  many  lines  of  business,  and  rather  common  in  the  sale  of 
furniture,  machinery,  automobiles,  etc. 

June  9.  Received  check  from  the  Arlington  Hotel  for  balance  due. 

9.  Received  check  from  E.  R.  Simmons  for  $100.00,  to  apply  on  account. 

Deposit  the  checks  received  today. 

June  11.  Received  bill  from  the  Michigan  Bench  Co.,  dated  June  7,  for  $216.25;  terms 
2/10,  n/30. 

12.  Gave  check  to  the  Evening  News  for  advertising,  $42.75. 

13.  Paid  the  following  expenses  by  checks:  Edison  Light  &  Power  Co.,  $14.18;  City 
Gas  Co.,  $5.25;  Bell  Telephone  Co.,  $8.55;  C.  F.  Nagle,  Postmaster,  for  stamps, 
$10.00;  Union  Towel  Supply  Co.,  $3.00. 

14.  Sold  Solvay  Process  Co.,  849  Solvay  Building,  1  Watkins  Player  Piano  @  $650.00, 
1  Watkins  Piano  @  $330.00,  1  Bench  @  $12.00;  terms  of  sale  2/10,  n/30. 
Took  in  exchange  one  used  piano  and  allowed  them  $75.00  for  it. 

15.  Paid  salaries  by  checks  as  follows:  S.  N.  Monroe,  salesman,  $75.00;  (yourself), 
bookkeeper,  $60.00;  Roy  Thomas,  truck  driver,  $50.00. 

15.  Received  from  Loewe  Theatre  Co.,  cash  $1367.00,  discount  $33.00. 

16.  Paid  Excelsior  Piano  Co.  for  bill  of  May  18,  check  $1128.22,  discount  $23.03. 
18.  Sold  Hovey  Candy  Co.,  18  Main  St.,  1  Watkins  Player  Piano  @  $675.00,  1 

Bench  $10.00;  terms  $300.00  cash  and  note  for  the  balance,  at  60  days,  6%. 

Deposit  all  checks  on  hand. 


SET  IV— RETAIL  PIANO  BUSINESS— TWO  MONTHS  115 

June  18.  Paid  Lane  Furniture  Co.  by  check  for  repairing  the  used  pianos  received  from 
Loewe  Theatre  Co.  $106.50.     (Charge  Purchases  account.) 

19.  Paid  The  Parker  Insurance  Agency  for  fire  insurance  policy  covering  stock, 
$48.60,  and  automobile  insurance,  $108.95;  both  policies  were  dated  May  1, 
amount  of  check  $157.55. 

20.  Received  check  from  B.  M.  Anderson,  $50.00. 

21.  Sold  J.  B.  Marks,  1236  Forest  Ave.,  1  Steck  Piano  @  $135.00,  1  Bench  @  $15.00; 
terms  $50  cash  and  $10  per  month  until  paid. 

(This  was  one  of  the  used  pianos.) 

June  22.  Received  cash  from  Strand  Theatre  Co.  in  full  of  account. 

Deposit  all  checks  on  hand. 

June  23.  Received  bill  from  Piano  Products  Co.  for  $1824.75,  dated  June  18;  terms  2/10, 
n/30. 
25.  Sold  F.  W.  Brooks,  3125  Woodlawn  Ave.,  1  Watkins  Player  Piano  @  $675.00, 
1  Bench  @  $15.00;  terms  $250  cash,  note  at  90  days,  6%  for  the  balance. 

25.  There  was  an  error  of  $10  in  the  amount  of  the  bill  sent  to  J.  B.  Marks.  The 
piano  should  have  been  billed  for  $125.00  instead  of  $135.00.  Make  the  proper 
correcting  entry. 

26.  Paid  expense  bills  of  salesman,  $21.85,  for  an  out  of  town  trip.  Make  the  check 
payable  to  S.  N.  Monroe. 

27.  Sold  F.  H.  Dodd,  for  cash,  1  Steck  piano  and  1  bench,  $135.00. 

Treat  this  cash  sale  the  same  as  you  did  the  cash  sale  on  May  28. 

June  27.  Received  check  for  $15.00  from  Wilkins  Office  Supply  Co.  for  use  of  truck. 
Deposit  all  checks  on  hand. 

June  28.  Paid  Standard  Garage  for  gasoline  and  oil  $28.64;  Wilkins  Office  Supply  Co. 
for  stationery,  $15.75;  McLen  Printing  Co.  for  printing,  $11.80. 

28.  Gave  W.  H.  Watkins  check  for  $250.00. 

29.  Gave  check  to  The  Parker  Insurance  Agency  for  W.  H.  Watkins'  life  insurance 
premium,  $83.78. 

30.  Paid  salaries,  by  checks,  as  follows:  S.  N.  Monroe,  salesman,  $75.00;  (yourself), 
bookkeeper,  $60.00;  Roy  Thomas,  truck  driver,  $50.00. 

30.  Make  entry  for  salary  allowance  of  W.  H.  Watkins. 
Merchandise  Inventory  June  30,  $4738.50. 

PROGRAM  FOR  CLOSING 

1.  Post  and  take  a  trial  balance. 

2.  Close  and  rule  the  special  books  of  original  entry. 

3.  Compare  each  of  the  notes  receivable  in  the  office  safe  and  their  total  with  the 
postings  to  the  Notes  Receivable  account  and  its  balance  as  shown  by  the  ledger  for  the 
month  of  June.     (They  should  agree.) 


116 


LYONS'  BOOKKEEPING  AND  ACCOUNTTNG 


4.  Reconcile  the  balance  of  the  cash  book  with  the  balance  shown  by  the  bank  state- 
ment on  June  30,  and  record  the  reconciliation  in  the  cash  book. 

In  making  the  reconciliation  remember  there  were  certain  outstanding  checks  on 
May  31. 

5.  Make  monthly  statements  to  customers. 

6.  Prepare  a  Trading  and  Profit  and  Loss  Statement. 

It  is  advisable  to  use  journal  paper  with  three  amount  columns,  but,  in  case  such  paper 
is  not  obtainable,  rule  a  third  column  immediately  to  the  left  of  the  first  amount  column 
of  the  regular  two-column  journal  paper.  This  paper  will  then  suffice  for  both  the  Trading 
and  Profit  and  Loss  Statement,  and  the  Balance  Sheet. 

Because  of  the  introduction  of  the  accounts  affecting  Purchases  and  Sales  accounts, 
it  is  necessary  also  to  introduce  a  new  section  for  the  Profit  and  Loss  Statement,  known 
as  the  Trading  Statement,  or  trading  section  of  the  Trading  and  Profit  and  Loss  Statement. 
The  form  for  this  statement  follows.    Study  it. 

TRADING  STATEMENT 


Gross  Sales 

Less:  Discount  on  Sales 

Sales  Rebates  &  Allowances 

Freight-Out 

♦  ♦  ■  ** 

**•  ** 

_ 

Total  deductions 

Net  Sales 

Mdse.  Inventory  May  1 

Purchases 

Add:  Freight-In 

**  ■  ** 

tnnnn,-  tuf 

ififtftf  ■  «« 

****■ ** 

Gross  Purchases 

Less:  Discount  on  Purchases 

Net  Purchases 

Less:  Inventory  June  30 

Cost  of  Goods  Sold 
Gross  Profit 

After  determining  the  gross  profit,  proceed  as  in  former  statements  except  with  Selling 
Expense  and  Insurance  accounts  which,  owing  to  the  deferred  charges  they  contain,  are 
handled  as  follows: 

On  May  9  a  bill  for  advertising  on  bill  boards  was  paid  6  months  in  advance  and  the 
whole  amount  was  charged  to  Selling  Expense  account,  whereas  on  June  30  two  months' 
advertising  Q/^  of  the  whole  amount)  had  actually  expired.  Therefore,  there  were  four 
months'  advertising  paid  for,  and  W.  H.  Watkins  is  still  entitled  to  four  months'  service 
which  amounts  to  $200.00.  This  amount  should  be  "carried  over"  and  charged  in  the 
next  fiscal  period.  Therefore,  the  amount  of  the  Selling  Expense  account  chargeable  to 
the  present  fiscal  period  is  the  balance  of  the  account  minus  the  deferred  charge,    and 


SET  IV— RETAIL  PIANO  BUSINESS— TWO  MONTHS 


117 


it  should  be  placed  on  the  Profit  and  Loss  Statement  immediately  following  the  "General 
Expense"  item. 

The  amounts  charged  on  June  19  to  the  Insurance  account  were  for  payments  of 
premium  for  one  year  in  advance  from  May  1.  On  June  30  only  two  months'  time,  (3^  of 
one  year)  has  expired,  and  this  proportionate  amount  of  premium  is  an  actual  expense 
chargeable  to  the  present  fiscal  period.  The  remainder  of  the  Insurance  account  should 
be  "carried  over"  as  a  deferred  charge  and  charged  to  expense  in  the  following  fiscal 
period.  Therefore,  one  sixth  of  the  amount  of  the  present  Insurance  account  should 
appear  in  the  Profit  and  Loss  Statement  immediately  following  the  "Selling  Expense" 
item. 

By  footing  the  amounts  of  these  three  items  the  total  expense  for  the  present  fiscal 
period  may  be  obtained. 

7.  Prepare  a  Balance  Sheet. 

In  the  preparation  of  the  Balance  Sheet  four  new  accounts  will  be  used :  Office  Equip- 
ment, DeUvery  Equipment,  Selling  Expense,  and  Insurance,  the  two  latter  accounts 
composing  Deferred  Charges. 

These  accounts  should  appear  on  the  Balance  Sheet,  in  the  order  named,  immediately 
following  the  "Mdse  Inventory  6/30"  item  as  follows: 


Office  Equipment 

**■  ** 

Delivery  Equipment 

***■ ** 

Deferred  Chargea 

Selling  Expense 

***• ** 

Insurance 

***■ ** 

****. ** 

8.  Make  the  necessary  closing  journal  entries  and  post  them. 

CLOSING  DIAGRAM 
1 


\ 


2 

INVENTORY 

^ 

PURCHASES 

3 

FREIGHT-IN 

':,..._-. 

« 

V 

DISCOUNT  ON 
PURCHASES 

' 

INVENTORY 
(Emi  el  Period) 

■ 

S 

COST  OF  SALES    '' 

'  5 

TRADING  STATEMENT- 

7 

\ 

FREIGHT-OUT 

-^ 

SALES 

1 

DISCOUNT  ON 
SALES 

~ 

REBATES  i  ALLOW- 
ANCES ON  SALES 

->— 

10 

GROSS  PROFIT    "^ 

'  9 

< 

11 

GENERAL  EXPENSE 

->- 

PROFIT  AND  LOSS 

12 

SELLING  EXPENSE 

- 

13 

<y 

INSURANCE 
(Expired  Amount) 

\ 

PROFIT  AND  LOSS 
STATEMENT 

INTEREST 

■>-'-  

NET  PROFIT     ^  '  14 

) 

PROPRIETORS  CAPITAL 

118  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

There  are  now  two  classes  of  accounts  affected  by  closing  journal  entries:  those 
accounts  composing  the  trading  section  of  the  Trading  and  Profit  and  Loss  Statement,  and 
the  accounts  closed  into  the  Profit  &  Loss  account. 

First,  close  into  the  Sales  account  all  those  accounts  which  are  used  in  the  Trading 
Statement  to  obtain  net  sales. 

Second,  close  into  the  Purchases  account  all  those  accounts,  which  are  used  in  the 
Trading  Statement  to  obtain  net  purchases. 

Third,  proceed  in  the  usual  manner  to  close  the  accounts  showing  profits,  losses,  etc., 
including  the  amounts  shown  on  the  Trading  and  Profit  and  Loss  Statement  as  Selling 
Expense  and  Insurance. 

9,  Rule  the  ledger. 

Proceed  in  the  usual  way  to  rule  the  accounts  affected  by  the  closing  entries.  How- 
ever, two  new  accounts  will  be  encountered:   Selling  Expense,  and  Insurance. 

After  posting  the  closing  journal  entries  made  for  this  set,  the  Selling  Expense  account 
balance  should  show  only  the  amount  of  the  deferred  charge,  or  the  amount  "carried 
over".  The  same  is  true  in  regard  to  the  Insurance  account.  Therefore,  these  two  accounts 
are  simply  balanced,  ruled  and  the  balances  brought  down,  which  begins  them  anew 
for  the  next  fiscal  period,  showing  the  amount  of  the  deferred  charge  in  each  account  as 
the  first  debit  item. 

10.  Take  a  trial  balance  after  closing. 
Compare  this  trial  balance  with  the  Balance  Sheet. 

EXERCISE  LXVIII 

Analyze  the  General  Expense  account  for  May  and  June. 

For  this  purpose  it  is  advisable  to  use  journal  paper,  or  rule  some  kind  of  paper  with  four  columns. 
Head  the  columns  according  to  the  expense  groups  given  on  page  99.  Then  show  the  amount  of  expense 
under  each  heading  and  compare  the  amount  under  each  heading  for  May  and  for  June.  The  totals  of  the 
two  sheets  should  agree  with  the  amount  of  the  General  Expense  account  on  June  30. 

EXERCISE  LXIX 

Analyze  the  Selling  Expense  account  for  May  and  June. 

Rule  four  columns  the  same  as  for  the  analysis  of  the  General  Expense  account,  but  head  the  columns 
according  to  the  Selling  Expense  group  given  on  page  99.  Compare  the  amount  under  each  heading  for 
May  and  June.  The  totals  of  the  two  sheets  should  agree  with  the  amount  of  the  Selling  Expense  account 
on  June  30,  according  to  the  Trading,  Profit  and  Loss  Statement. 

EXERCISE  LXX 

Take  from  the  outfit,  Test  Ledger  No.  2,  and  proceed  as  follows  with  it:  1.  Take  a  trial  balance; 
2.  Prepare  a  Trading  and  Profit  and  Loss  Statement;  3.  Prepare  a  Balance  Sheet ;  4.  Make  the  necessary 
closing  journal  entries,  post  them,  close  the  ledger  and  rule  the  necessary  accounts. 

The  Merchandise  Inventory  on  June  30  was  $9138.42;  there  was  advertising,  paid  in  advance,  which 
amounted  to  $150.00.  One  twelfth  of  the  amount  of  the  Insurance  account  should  be  charged  off.  (1/12 
equals  the  expired  premium  for  the  month  of  June.) 


SUPPLEMENTARY  EXERCISES  119 

SUPPLEMENTARY  EXERCISES 

The  following  exercises  are  given  that  they  may  be  made  an  important  part  of  the 
course.  Each  exercise  represents  a  thought  problem,  or  presents  a  form  or  device  with 
which  the  student  should  be  familiar. 

These  exercises  may  be  postponed  to  the  end  of  a  semester  or  they  may  be  interspersed 
with  the  work  of  the  sets.  If  the  latter  plan  is  used,  care  should  be  taken  that  an  exercise, 
assigned  to  the  class,  contains  only  the  principles  with  which  the  students  are  familiar. 

Accuracy,  rapidity  and  neatness  should  be  emphasized  in  this  work  the  same  as  in 
the  sets — these  are  the  prime  requisites  of  a  bookkeeper  or  office  clerk. 

The  solution  of  each  exercise  should  require  from  15  minutes  to  40  minutes. 

EXERCISE  LXXI 

The  trading  accounts  on  the  ledger  of  the  Dahl-Milligan  Co.  for  the  three  months  ended  June  30 
show  the  following  balances:  Sales  $75,683.14,  Discount  on  Sales  $837.40,  Sales  Rebates  and  Allowances 
$1418.72,  Freight-Out  $437.63,  Inventory  Apr.  1  $21,647.18,  Purchases  $70,496.35,  Freight-In  $597.78, 
Discount  on  Purchases  $1321.92,  Inventory  June  30  $28,682.94. 

Prepare  a  Trading  Statement  showing  the  gross  profit  from  sales. 

EXERCISE  LXXII 

The  profit  and  loss  accounts  on  the  ledger  of  the  Dahl-Milhgan  Co.  for  the  three  months  ended 

June  30,  show  the  following  balances:  Gross  Profit  $ (from  the  previous  exercise),  General 

Expense  $3282.77,  Selling  Expense  $4172,93,  Insurance  $1282.64.  The  deferred  charges  are  as  follows: 
Selling  Expense  account  $650.00,  Insurance  account  $961.98. 

Prepare  a  Profit  and  Loss  Statement  showing  the  net  profit  for  the  three  months. 

EXERCISE  LXXIII 

As  an  additional  study  of  the  use  of  the  journal  and  ledger  the  following  exercise  will  be  found  bene- 
ficial. 

The  accounts  in  skeleton  ledger  form  may  be  placed  on  a  blackboard,  or  each  student  may  copy  them 
on  a  piece  of  paper  large  enough  to  contain  all  the  accounts. 

Determine  orally  the  entry  for  each  transaction,  then  place  the  results  of  each  entry  in  the  proper 
account.  Note  the  change  in  each  account  particularly  as  to  whether  the  entry  causes  the  balance  of  both 
accounts  to  increase  or  diminish,  or  one  to  diminish  and  the  other  to  increase. 

Cash  James  Brown  John  Black  Henry  James 


2000  I  200  I  300  I  I  400 

J.  Phelps,  Proprietor  Sales  Purchases  Expense 


I  2100 

1.  James  Brown  paid  $100  on  account. 

2.  Paid  rent  for  one  month,  $50. 

3.  Bought  of  Henry  James,  on  accoimt,  goods  amounting  to  $250. 

4.  Sold  to  James  Brown,  on  account,  for  $325  all  the  goods  that  have  been  purchased. 

5.  Paid  Henry  James  $500  on  account. 

6.  Received  from  John  Black  $300  on  account. 

7.  James  Phelps,  proprietor,  withdrew  $100. 

8.  Paid  for  advertising  $5.00. 

9.  J.  Phelps,  proprietor,  invested  cash,  $300. 


120 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


EXERCISE  LXXIV 

Take  a  trial  balance  from  the  ledger  contained  in  Exercise  LXXIII  after  the  entries  are  made.  Prepare 
a  Profit  and  Loss  Statement  and  a  Balance  Sheet. 

EXERCISE  LXXV 

Arrange  a  trial  balance  from  the  following  accounts,  supply  the  amounts  and  observe  that  each  account 
shows  the  balance  on  the  proper  side  of  the  trial  balance:  Cash,  Accounts  Receivable,  Notes  Receivable, 
Accounts  Payable,  Proprietor's  Capital,  Sales,  Purchases,  General  Expense,  Interest. 

EXERCISE  LXXVl 

Arrange  a  trial  balance  from  the  following  accounts,  supply  the  amounts  and  observe  that  each  account 
shows  the  balance  on  the  proper  side  of  the  trial  balance:  Cash,  Accounts  Receivable,  Notes  Receivable, 
Accounts  Payable,  Notes  Payable,  Proprietor's  Capital,  Sales,  Purchases,  General  Expense,  Selling  Expense, 
Discount  on  Sales,  Discount  on  Purchases,  Freight-In,  Freight-Out,  Interest,  Rebates  and  Allowances 
on  Sales,  Insurance. 

EXERCISE  LXXVII 

Arrange  in  proper  form  for  a  Profit  and  Loss  Statement,  the  following  accounts:  Sales,  Inventory 
(at  beginning  of  the  period),  Purchases,  Inventory  (at  close  of  period),  General  Expense. 


EXERCISE  LXXVIII 


Arrange  the  following  accounts  in  proper  form  for  a  Balance  Sheet: 
Accounts  Payable  and  Proprietor's  Capital. 


Cash,  Accounts  Receivable, 


EXERCISE  LXXIX 


On  June  30,  by  analyzing  the  General  Expense  account,  it  was  found  to  contain  an  amount  of  $150 
that  should  have  been  charged  to  Selling  Expense.  Make  the  proper  correcting  entry  for  this  error.  If 
this  error  had  not  been  corrected,  how  would  it  have  affected  the  net  profit  or  the  net  loss  on  June  30? 

EXERCISE  LXXX 

On  May  10  the  bookkeeper  for  Judson  &  Co.  charged  an  amount  of  $210.00  to  Office  Equipment 
account,  which  should  have  been  charged  to  General  Expense  account.  Make  an  entry  correcting  the 
error. 

State  in  writing  what  effect  this  erroneous  entry  would  have  had  upon  the  Profit  and  Loss  Statement 
and  the  Balance  Sheet  on  June  30,  if  not  corrected. 

EXERCISE  LXXXI 

Below  is  a  trial  balance  taken  from  the  books  of  B.  F.  Williams,  on  May  31,  19 — . 


Trial  Balance 

Trial  Balance 

May  31 

Journal  Entries 

June  30 

Cash 

1319.74 

Accounts  Receivable 

3682.94 

Notes  Receivable 

800.00 

Mdse.  Inventory 

6352.76 

Accounts  Payable 

2183.96 

B.  F.  Williams,  Prop. 

9640.84 

Sales 

8474.61 

Purchases 

7392.47 

General  Expense 

755.18 

Interest 

3.68 

20303.09 

20303.09 

SUPPLEMENTARY  EXERCISES 


121 


During  the  month  of  June  the  following  transactions  were  made : 

Sales  on  account  $4264.12,  purchases  of  merchandise  on  accoimt  $3889.74,  cash  received  from  customers 
on  account  $5,297.38,  cash  paid  to  creditors  on  account  $3211.86,  cash  received  on  notes  $500.00,  cash 
received  for  interest  $2.72,  cash  paid  for  items  charged  to  general  expense  $218.64,  notes  received  from 
customers  $250.00,  B.  F.  Wilhams,  proprietor,  withdrew  cash  $500.00. 

Rule  paper  to  provide  six  columns  and  head  the  columns  to  correspond  with  the  headings  shown  in 
the  illustration  for  this  particular  exercise.  Make  the  necessary  journal  entries  on  a  separate  sheet  of  jour- 
nal paper  to  record  the  transactions  enumerated;  post  the  entries  to  the  proper  columns  and  take  a  trial 
balance  as  of  June  30. 


EXERCISE  LXXXII 


The  following  Balance  Sheet  (in  trial  balance  form)  shows  the  financial  condition  of  Hunter  &  Hunter 
on  Sep.  30,  19 — .  They  have  been  operating  a  cash  business  and  have  decided  to  discontinue  it  and  dissolve 
partnership. 


Cash 

Mdse.  Inventory 
Ofiice  Equipment 
Delivery  Equipment 
Accounts  Payable 
H.  B.  Hunter,  Partner 
J.  F.  Hunter,  Partner 


Trial  Balance 
Sep.  30 

Journal  Entries 

Trial  Balance 

3218.64 

3968.42 

483.62 

1283.46 

846.12 
4036.18 
4071.84 

8954.14 

8954.14 

During  October  they  sold  all  property  for  cash  as  follows:  Merchandise  inventory  $2657.75,  oflBce 
equipment  $200.00,  delivery  equipment  $750.00;  they  also  paid  all  accounts  which  they  owed  on  Sept.  30. 

The  difference  between  the  sale  price  of  the  property  and  the  value  at  which  it  was  carried  on  the 
books  was  charged  to  profit  and  loss.  Under  the  partnership  agreement  all  losses  and  gains  were  to  be 
divided  equally. 

Record  the  transactions,  ptost,  take  a  trial  balance,  make  statements  showing  the  loss  from  dissolution 
and  also  showing  the  amount  of  cash  taken  by  each  partner. 

EXERCISE  LXXXIII 

This  work  may  be  done  on  a  blackboard  or  as  a  desk  exercise. 


Sales 


Purchases 


I  1250.00 
General  Expense 


1183.00  I 
Profit  and  Loss 


Inventory 


937.00 
J,  B.  Hanly,  Prop. 


115.00 


1000.00 


The  inventory  of  merchandise  at  the  time  of  closing  amounted  to  $1015.00. 

Make,  mentally,  the  necessary  closing  journal  entries  and  wTite  the  results  of  the  different  journal 
entries  into  the  accounts,  and  after  closing  the  accounts,  rule  them. 


122  *  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

EXERCISE  LXXXIV 

The  capital  accounts  of  J.  W.  HaU  and  F.  R.  Shane,  partners,  were  as  follows: 
J.  W.  Hall,  Partner  F.  R.  Shane,  Partner 


6387.42  5892.64 

(a)  Hall  bought  Shane's  interest  in  the  business  for  $5892.64,  and  gave  in  payment  a  personal  note 
for  $3000.00  and  the  balance  in  cash  Srom  the  business. 

Make  a  journal  entry  for  this  transaction. 

(b)  Hall  bought  Shane's  interest  in  the  business  for  $5892.64  and  gave  cash  in  payment  for  the  amount 
of  Shane's  investment.  The  cash  with  which  the  payment  was  made  was  not  taken  from  the  business, 
but  from  Hall's  personal  funds  outside  the  business. 

EXERCISE  LXXXV 

Make  entries  for  the  following: 
Dec.  14.  The  office  safe  was  broken  open  the  previous  night  and  all  cash,  amounting  to  $237.83,  was  taken. 
Feb.  17.  The  store  room  was  entered  the  previous  night  and  merchandise,  which  cost  $418.75,  was  taken. 
Mar.  20.  A  counterfeit  $10.00  bill  is  discovered  among  the  cash.    It  can  not  be  determined  from  whom  it 
was  received. 

EXERCISE  LXXXVI 

J.  W.  Beech  began  business  with  the  following  assets  and  liabilities  for  which  proper  opening  entries 
should  be  made:  Assets;  Cash  $1150.00,  Notes  Receivable  $1758.50,  Accounts  Receivable  $2120.50,  Mdse. 
Inventory  $1865.00,  Store  Equipment  $1380.00.  Liabihties;  Notes  Payable  $500.00,  Accounts  Payable 
$935.00. 

EXERCISE  LXXXVII 

R.  B.  Downey  and  W.  T.  Grant  began  business  on  Sept.  1.  Each  partner  contributed  to  the  firm  the 
following  assets  and  liabilities:  R.  B.  Downey  invested;  Cash  $2500.00,  Accounts  Receivable  $2250.00, 
Mdse.  Inventory  $2025.00,  Store  Equipment  $1275.00.  Downey's  habilities  consisted  of  Accounts  Payable, 
$940.00. 

W.  T.  Grant  invested;  Cash  $1150.00,  Notes  Receivable  $450.00,  Accounts  Receivable  $2850.00, 
Mdse.  Inventory  $2670.00,  Store  Equipment  $1450.00.  Grant's  liabilities  were  as  follows:  Notes  Payable 
$750.00,  Accounts  Payable  $1050.20. 

Make  proper  opening  entries  for  the  respective  investments  by  the  partners. 

EXERCISE  LXXXVIII 

James  Hadley  owns  a  business  and  on  Dec.  31  a  Balance  Sheet  of  his  business  showed  the  following: 
Cash  on  hand  $2150.00,  Notes  Receivable  $1500.00,  Accounts  Receivable  $3285.50,  Inventory  of  Merchan- 
dise $4750.50,  Store  Equipment  $940.00,  Delivery  Equipment  $1175.00,  Accounts  Payable  $1275.00. 

Thomas  McNeal  owns  a  business  and  on  Dec.  31  a  Balance  Sheet  of  his  business  showed  the  following: 
Cash  on  hand  $4620.00,  Notes  Receivable  $2500.00,  Accounts  Receivable  $8420.00,  Inventory  of  Merchan- 
dise $7290.00,  Store  Equipment  $2150.00,  DeUvery  Equipment  $1950.00,  Notes  Payable  $500.00,  Accounts 
Payable  $1020.00. 

Hadley  and  McNeal  are  going  to  combine  their  respective  businesses  and  the  firm  name  will  be  Hadlej-, 
McNeal  &  Co.;  also,  they  are  going  to  open  other  places  of  business  and  will  need  additional  capital  which 
they  are  to  supply  as  follows:  McNeal  is  to  add  cash  sufficient  to  bring  his  investment  to  $30,000.00; 
Hadley  is  to  transfer  to  the  partnership  Liberty  Bonds  valued  at  par  at  $5000.00  and  is  to  pay  in  cash 
sufficient  to  increase  his  total  investment  to  $20,000.00. 

Prepare  a  Balance  Sheet  for  Hadley  and  one  for  McNeal  after  they  have  made  the  necessary  additional 
investments. 

EXERCISE  LXXXIX 

Prepare  opening  entries  to  record  the  investments  of  the  partners  in  the  firm  of  Hadley,  McNeal  &  Co. 
in  Exercise  LXXXVIII.  Post  the  opening  entries  and  take  a  trial  balance  after  which  prepare  a  Balance 
Sheet  for  the  partnership. 


SUPPLEMENTARY  EXERCISES 


123 


EXERCISE  XC 

George  Peters  and  Samuel  White  are  partners  and  according  to  their  partnership  agreement  they  are 
to  divide  profits  and  losses  according  to  their  investments  which  are  respectively  2/3  and  1/3. 

A  Balance  Sheet  of  their  business  on  June  30  showed  the  follo\N-ing:  Cash  $2120.00,  Notes  Receivable 
$650.00,  Accounts  Receivable  $3850.00,  Inventory  of  Merchandise  $4260.00,  Office  Equipment  $635.00, 
Store  Equipment  $1682.50,  Dehvery  Equipment  $1875.50,  Notes  Payable  $1000.00,  Accounts  Payable 
$1380.00. 

Their  books  had  been  poorlj^  kept  and  no  trial  balance  had  been  obtained  after  June  30,  and  much 
information  which  would  be  necessary  to  obtain  a  trial  balance  had  been  omitted  from  the  books.  On 
Dec.  31,  following,  all  the  property  was  inventoried  and  the  personal  accounts  and  cash  were  verifed; 
likewise,  the  notes  receivable  and  the  notes  payable.  The  results  of  this  work  were  as  follows:  Cash 
$1850.00,  Notes  Receivable  $10CO.CO,  Accounts  Receivable  $5235.00,  Inventory  of  Merchandise  $3975.00, 
Office  Equipment  $575.00,  Store  Equipment  $1825.00,  Delivery  Equipment  $1875.50,  Notes  Payable 
$500,  Accounts  Payable  $1450.50. 

Prepare  a  Comparative  Balance  Sheet  and  from  the  increases  and  the  decreases  in  the  various  accounts, 
determine  the  net  profit  or  the  net  loss  for  the  period.  Apportion  the  net  loss  or  the  net  profit  to  the 
proprietors. 

PROBLEMS   BASED  UPON  TRADING   AND   PROFIT  AND  LOSS  STATEMENT 

Fowler  &  Jackson 


Trading  and  Profit  and  Loss  Statement 
For  the  year  ended  December  31,  19 — . 


Sales 

$75,000.00 

Mdse.  Inventory  Jan.  1 

$  4,300.00 

Purchases 

56,000.00 

Freight-In 

890.00 

Total  Purchases 

$61,190.00 

Mdse.  Inventory  Dec.  31 

4,800.00 

Cost  of  Goods  Sold 

$56,390.00 

Gross  Profit 

$18,610.00 

Rent 

$  2,250.00 

Salaries 

6,000.00 

Advertising 

525.00 

Heat  and  Light                    i 

375.00 

Dehvery 

1,500.00 

SuppUes   twne,  paper,  bags,  etc. 

225.00 

Insurance  and  Taxes 

300.00 

Miscellaneous 

225.00 

Depreciation 

450.00 

Bad  Debts 

225.00 

Total  Expenses 

$12,075.00 

Net  Profit 

$  6,535.00 

1.  Fowler  &  Jackson  buy  a  certain  article  at  $21.00  per  dozen.  For  how  much  should  one  of  these 
articles  be  sold  in  order  to  cover  all  expenses  and  maintain  the  ratio  of  net  profit  which  is  shown  by  their 
Trading  and  Profit  and  Loss  Statement? 


124  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

2.  They  are  about  to  become  agents  for  an  article  which  is  produced  by  the  Star  Manufacturing  Co. 
That  company  desires  to  maintain  a  uniform  price  for  its  products;  therefore,  it  requires  all  dealers  to  sign 
a  contract  which  fixes  both  a  dealer's  cost  price  and  selling  price  of  the  article.  These  prices  are  as  follows : 
Cost  per  dozen,  $42.60;  selling  price  per  article,  $4.25.  Will  these  prices  allow  a  margin  for  expenses  and 
profit  that  corresponds  to  the  present  margin  of  the  business? 

3.  Assume  that  Fowler  &  Jackson  were  permitted  to  sell  the  article  at  $4.75  each;  would  this  allow  them 
a  sufficient  margin  upon  which  they  could  maintain  their  present  ratio  of  net  profit? 

4.  The  inventories  of  Fowler  &  Jackson  show  an  average  value  of  $4550.00.  How  many  times  during 
the  year  have  they  "turned"  the  capital  that  is  invested  in  merchandise? 

6.  What  per  cent  of  the  sales  is  used  to  meet  each  kind  of  expense? 

6.  The  total  investment  in  the  business  is  $15,000.00.  The  net  profit  for  the  year  is  what  per  cent  of 
the  total  investment? 

7.  What  per  cent  is  added,  by  freight-in,  to  the  invoice  cost  of  the  goods? 

8.  Fowler  &  Jackson  are  equipped  to  handle  a  larger  volume  of  business  than  they  did  during  the  past 
year,  without  materially  increasing  their  expenses.  They  estimate  that  their  sales  should  be  $90,000.00 
during  the  coming  year  and  that  the  ratio  of  gross  profit  to  sales  should  remain  the  same  as  this  year. 
They  also  estimate  an  increase  of  5%  in  the  total  expenses  during  the  year.  Prepare  a  statement  which 
will  show  the  estimated  gross  profit,  total  expenses,  and  net  profit. 

9.  Arrange  all  expenses  in  two  groups,  viz.,  General  Expenses  and  Selling  Expense,  and  show  what  per- 
cent of  the  gross  profit  is  absorbed  by  each  class  of  expense. 

10.  What  per  cent  of  the  sales  is  each  class  of  expense? 

11.  Fowler  &  Jackson  buy  a  certain  article  which  costs  them  $8.34  per  gross,  including  freight.  How 
much  should  be  added  to  the  cost  of  one  of  these  articles  in  order  to  cover  expenses?  How  much  should 
be  added  to  the  cost  in  order  to  cover  expenses  and  maintain  the  present  rate  of  profit? 


PART  III. 
BUSINESS  ANALYSIS  AND  ACCOUNTING  DEVICES 

A  STUDY  OF  THE  BALANCE  SHEET 

HOW  TO  CLASSIFY  ASSETS  AND  LIABILITIES 

Assets  may  be  divided  into  four  general  classes,  namely,  current,  fixed,  accrued,  and 
deferred. 

Ciirrent  Assets  are  those  which  represent  investments  of  capital  that  mature  in 
a  short  time,  that  is,  those  assets  which  may  be  converted  readily  into  cash,  and  which, 
for  this  reason,  are  available  for  the  payment  of  current  liabilities. 

These  assets  include  cash  on  hand,  deposits  of  cash,  notes  receivable,  inventory  of 
merchandise,  and  accounts  receivable;  they  are  sometimes  called  liquid  or  quick  assets. 
In  a  mercantile  business  this  class  of  assets  constitutes  the  working  capital  of  the  business. 

Fixed  Assets  are  those  which  represent  investments  of  capital  that  are  more  perma- 
nent in  their  nature  than  the  current  assets.  Fixed  assets  generally  include  the  following: 
land  and  buildings,  delivery  equipment,  oflBce  equipment,  etc.  In  this  same  class  are 
investments  outside  the  business,  such  as  liberty  bonds  and  the  stocks  and  bonds  of  cor- 
porations.   This  group  of  assets  is  sometimes  referred  to  as  permanent  assets. 

Accrued  Assets,  or  non-ledger  assets  as  they  are  sometimes  called,  include  accumula- 
tions of  interest  on  notes  and  accounts  receivable,  on  liberty  bonds  and  on  other  similar 
investments,  accumulations  of  rent,  etc.  The  value  of  a  note  or  bond  changes  each  day 
because  of  the  accumulation  of  interest  on  it.  Since  it  would  be  impractical  to  make  an 
entry  or  entries  each  day  to  "take  up,"  on  the  books,  this  accumulation,  it  is  the  custom 
to  do  it  periodically,  generally  at  the  end  of  a  fiscal  period. 

Some  accountants  consider  accrued  assets  as  a  part  of  the  current  assets,  and  place 
them  on  the  Balance  Sheet  as  a  part  of  the  current  assets.  If  this  be  done,  the  Balance 
Sheet  will  then  show  three  groups  of  assets  instead  of  four  groups. 

Deferred  Assets,  or  deferred  charges  to  expense,  may  be  defined  as  expenditures  of 
capital  for  items  of  expense  that  are  not  applicable  to  the  fiscal  period  in  which  such  charges 
originate;  hence,  they  are  deferred,  or  "carried  over"  to  a  future  fiscal  period.  Prominent 
among  such  charges  are  the  following  items:  taxes,  insurance,  rent,  advertising,  etc. 

Liabilities  also  may  be  divided  into  four  general  classes,  namely,  current,  fixed, 
accrued,  and  deferred. 

Current  Liabilities  include  all  debts  that  become  due  in  comparatively  short  periods 
of  time,  such  as  notes  payable,  accounts  payable,  unpaid  wages,  etc.  In  other  words, 
these  liabilities  represent  the  debts  that  must  be  paid  out  of  current  funds,  or  funds  realized 
from  the  current  assets.  Therefore,  to  meet  these  constantly  maturing  obligations,  the 
business  man  must  see  that  too  much  of  the  capital  of  the  business  does  not  become  "tied 
up"  in  permanent  investments. 

125 


126  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Fixed  Liabilities,  sometimes  called  permanent  liabilities,  may  be  defined  as  those 
liabilities  which  mature  at  a  fixed  time,  usually  a  number  of  years  in  the  future.  Mort- 
gages payable  and  bonds  payable  are  examples  of  this  class  of  liabilities.  They  are  also 
known  as  capital  liabilities. 

Accrued  Liabilities  include  the  accumulations  from  day  to  day  of  wages,  taxes,  rents, 
interest  accrued  on  notes  and  accounts  payable,  etc.,  that  cannot  readily  be  "taken  up" 
on  the  books  except  at  certain  intervals;  but  in  order  to  show  the  correct  financial  condition 
of  the  business,  these  things  must  be  considered.  Thus,  if  it  is  desired  to  prepare  a  Balance 
Sheet  as  at  December  31,  it  is  necessary  to  determine  the  amount  of  the  debts,  if  any, 
that  have  accrued  to  this  date,  but  that  do  not  show  on  the  ledger. 

For  example:  Employees  may  be  paid  each  week;  but  if  the  end  of  the  week  does 
not  coincide  with  the  end  of  the  month,  there  will  be  an  accruement  of  wages  at  the  end 
of  the  month.  Therefore,  this  accumulation  of  wages  must  be  "taken  up"  if  the  correct 
financial  condition  is  to  be  shown  by  the  Balance  Sheet. 

These  liabilities  may  be  included  in  the  Balance  Sheet  with  the  current  liabilities, 
or  they  may  be  considered  as  a  separate  class  of  liabilities.  However,  if  the  accrued 
liabilities  are  placed  among  the  current  liabilities,  it  is  advisable  to  give  them  a  special 
heading  so  that  they  may  be  distinguished  from  the  other  current  liabilities. 

Deferred  Liabilities,  or  deferred  credits  to  income,  constitute  the  last  group  of  liabili- 
ties on  the  Balance  Sheet.  ''This  class  is  composed  of  credits  to  income,  during  a  fiscal 
period,  for  which  full  value  has  not  been  given  during  the  period.  For  example:  If  a 
business  should  sub-let  a  part  of  a  building  and  the  tenant  should  pay  rent  on  December  1 
for  three  months  in  advance,  the  two  months'  rent  which  is  unexpired  on  December  31 
would  be  a  deferred  credit  to  income,  since  no  value  has  been  given  for  it.  A  transaction 
which  produces  a  deferred  credit  to  income  on  the  books  of  one  party  to  a  transaction 
will  produce  a  deferred  charge  on  the  books  of  the  other  party. 

Deferred  credits  to  income  must  be  considered  in  the  preparation  of  a  Balance  Sheet, 
because,  by  crediting  the  full  amount  to  income,  the  net  profit  will  be  too  large;  and  this, 
in  turn,  will  increase  the  net  capital  of  the  business, — a  manifestly  incorrect  result.  There- 
fore, such  unearned  income  is  deferred,  or  "carried  over"  to  the  next  fiscal  period  to  which 
it  is  applicable.  Unearned  income  assumes  considerable  importance  in  the  bookkeeping 
of  banks,  insurance  companies,  etc. 

ARRANGEMENT  OF  THE   BALANCE  SHEET 

It  has  been  explained  that  there  are  several  classes  of  assets  and  liabilities.  In  the 
preparation  of  a  Balance  Sheet  these  various  classes  of  assets  and  liabilities  might  be 
included  without  regard  to  any  particular  plan, — in  fact  this  is  often  done.  But  most 
business  men  and  accountants  prefer  some  general  plan  of  arrangement.  The  plan  fol- 
lowed in  this  textbook  is  that  of  arranging  the  different  classes  of  assets  according  to  their 
availability  for  the  payment  of  debts. 

Thus,  the  current  assets  are  placed  first,  the  permanent  or  fixed  assets  second,  and  the 
prepaid  or  deferred  assets  third.  The  accrued  assets  may  be  included  with  the  current 
assets,  or  they  may  be  considered  as  a  separate  class.  If,  however,  they  are  considered 
as  a  separate  class  of  assets,  they  should  constitute  the  second  group,  thus  causing  the 
fixed  or  permanent  assets  to  become  the  third  group,  and  the  prepaid  or  deferred  assets, 
the  fourth  group. 


A  STUDY  OF  THE  BALANCE  SHEET  127 

The  liabilities  should  be  arranged  in  a  similar  order:  first,  the  current  liabilities;  second, 
the  fixed  or  permanent  liabilities;  third,  the  deferred  credits  to  income.  Accrued  liabilities 
may  be  included  with  the  current  liabihties  or  they  may  be  considered  as  a  separate  class 
of  liabilities.  If  they  are  considered  as  a  separate  class,  they  should  constitute  the  second 
group  of  liabihties,  thus  causing  the  fixed  or  permanent  liabilities  to  become  the  third 
group,  and  the  deferred  credits  to  income  to  become  the  fourth. 

With  the  liabilities,  though  not  itself  a  liabihty,  should  be  placed  the  net  capital  of 
the  proprietor  or  proprietors.     This  represents  the  proprietary  interest  in  the  business. 

AVAILABILITY  OF  ASSETS   FOR  PAYMENT  OF   DEBTS 

Thus,  it  will  be  seen  that  under  this  plan  of  arrangement  the  current  assets  may  be 
compared  instantly  with  the  current  liabihties,  as  these  two  groups  are,  for  many  purposes, 
the  most  important  on  the  Balance  Sheet. 

Cash  is  the  first  asset  required  for  the  payment  of  debts.  If  the  cash  balance  is  low, 
the  notes  receivable  may  be  discounted  at  a  bank  and  additional  cash  acquired;  or  if  there 
are  no  notes  receivable,  the  accounts  receivable  may  be  sold  to  obtain  cash. 

Accrued  assets  may  in  time  supply  a  certain  amount  of  cash;  but,  in  the  ordinary 
business,  these  assets  are  almost  negligible  as  a  source  of  cash.  The  fixed  assets  of  a  going 
business  cannot  be  utilized  in  meeting  current  obligations,  except  by  making  them  the 
basis  of  a  loan.  This  is  seldom  done,  and  only  in  extreme  cases;  because,  if  it  should 
become  necessary  to  sell  the  fixed  assets  to  meet  the  loan  which  they  secure,  the  business 
could  not,  in  most  instances,  be  continued  to  advantage  and  would,  consequently,  be 
forced  into  liquidation.  Therefore,  in  a  going  business,  it  is  necessary  that  sufficient 
current  assets  be  maintained  to  meet  current  liabilities. 

In  liquidation,  the  fixed  assets  of  a  business  usually  undergo  tremendous  shrinkage. 
They  can  be  sold  only  as  used  or  second-hand  articles,  for  which  buyers  are  not  anxious 
to  pay  more  than  a  small  per  cent  of  the  book  value, — the  value  at  which  they  are  carried 
on  the  books  of  the  business. 

Deferred  assets  have  but  little  value  in  liquidation,  though  accrued  assets  may  have 
about  the  same  value  in  liquidation  that  they  would  have  in  a  going  concern. 

It  is  clear,  therefore,  that  if  a  loan  is  made  or  credit  is  extended,  the  creditor  must 
have  in  mind  not  only  the  value  of  the  assets  as  in  a  going  business  but  also  the  value  of 
the  assets  as  in  a  business  which  is  being  liquidated.  If  he  does  not  do  so,  he  may  have 
cause  for  grief. 

The  current  assets  of  a  business  are  frequently  spoken  of  as  the  working  capital. 
This  simply  means  that  the  current  assets  measures  the  volume  of  capital  that  remains 
liquid  in  the  business  and  therefore  available  for  conducting  the  operations  of  the  business. 
Or,  in  other  words,  it  is  the  amount  of  capital  with  which  the  business  must  be  conducted. 

FORMS  OF  BALANCE  SHEET 

The  form  of  Balance  Sheet  previously  used  in  this  textbook  is  commonly  known  as 
the  report  form  while  the  Balance  Sheet  following  is  in  the  account  form.  It  will  be 
observed  that  either  form  must  contain  the  same  information  and  in  this  respect  there 
can  be  no  difference.  It  is  probable  that  the  report  form  is  the  more  popular,  and,  since 
it  is  more  easily  placed  on  ordinary  journal  paper  the  student  would  do  well  in  adapting 
himself  to  this  form  for  all  his  work  unless  instructed  otherwise. 


128  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Study  the  following  account  form  of  a  Balance  Sheet. 


William 

Harper 

Balance  Sheet  Dec.  31,  19—. 

Assets 
Current 

Liabilities  and  Capital 
Current 

Cash                                     $2000.00 
Notes  Receivable                  1 500 .  00 
Accounts  Receivable             2500 .  00 

Notes  Payable 
Accounts  Payable 

$2000.00 
1000.00 

$3000.00 

Mdse.  Inventory                   3000 .  00 

$9000.00 

$1000.00 
$10,000.00 

Capital 

Net  Capital — 

William  Harper 

Fixed 

Office  Equipment                $  500 .  00 

Delivery  Equipment               500 .  00 

$7000.00 

$10,000.00 

This  Balance  Sheet  was  prepared  from  the  account?  shown  by  the  ledger  and  was 
correct  according  to  the  ledger. 

But,  it  was  discovered  that  there  were  certain  assets  and  liabilities  that  the  ledger 
did  not  show.  They  were  as  follows:  Assets;  accrued  interest  on  notes  receivable  $20.00, 
accrued  interest  on  the  bank  balance  $30.00,  insurance  premiums  paid  in  advance  $100.00, 
and  prepaid  advertising  $50.00.  Liabilities;  interest  accrued  on  notes  payable  $25.00  and 
there  had  been  omitted  from  the  accounts  payable,  certain  bills  which  had  not  been  received 
from  creditors  on  December  31,  but  the  goods  represented  by  these  bills  had  been  received 
and  had  been  included  in  the  inventory  of  merchandise  on  December  31.  The  amount  of 
these  bills  was  $1000.00. 


EXERCISE  I 


Prepare  a  Balance  Sheet  in  the  account  form  and  include  all  assets  and  liabilities  that  had  been 
omitted  from  the  previous  Balance  Sheet.    Use  the  form  which  follows: 


William  Harper 

Balance  Sheet  Dec 

.  31,  19—. 

Assets 

Liabilities  and  Capital 

Current 

Current 

Cash 

^iHt-  I|c« 

Notes  Payable                              ***' 

** 

Notes  Receivable 

***• ** 

Accounts  Payable                        *  *  * " 

** 

Accounts  Receivable 

***• ** 

Accrued  Interest                          ***" 

** 

Mdse.  Inventory 

*** ■ ** 

Ca-pital 

Net  Capital— William  Harper 

Accrued  Interest 

*if:tl.-   **          IHfil.-   ** 

Fixed 

Office  Equipment 

***• ** 

Dehvery  Equipment 

IHHf-  iHf         «*:«■«« 

Deferred  Charges 

Insurance 

***• ** 

Advertising 

iHfif-  iHf          4<**-*« 

ifielf  if* 

A  STUDY  OF  THE  BALANCE  SHEET 


129 


QUESTIONS   ON   WILLIAM  HARPER'S   BALANCE  SHEET 

1.  By  what  amount  was  the  total  assets  of  the  business  increased  by  including  the  accrued  and  prepaid 
assets? 

2.  By  what  amount  was  the  total  liabilities  of  the  business  increased  by  including  the  accrued  liabilities 
and  the  liabilities  for  goods  received  for  which  no  bills  had  been  received? 

3.  What  was  the  net  increase  or  the  net  decrease  in  the  capital  of  WiUiam  Harper? 

4.  Should  property,  only  partially  paid  for,  be  included  among  the  assets  without  including  the  unpaid 
amount  among  the  liabilities?     Why? 

5.  If  accrued  assets  and  accrued  liabilities  are  omitted  from  the  Balance  Sheet,  will  it  show  the  correct 
financial  condition  of  the  business? 

6.  What  value  would  the  two  items  of  deferred  charges  have  for  conversion  into  cash  with  which  to 
pay  the  debts  of  the  business? 

7.  Suppose  you  were  trying  to  prepare  a  Balance  Sheet  and  there  were  some  accounts  with  such 
indefinite  titles  that  you  would  not  know  whether  they  represented  assets  or  expenses.  How  would  you 
determine  which  they  were? 

HOW  A  BALANCE  SHEET   IS  USED  AS  AN  AID   IN  FINANCING 

Frequently  a  business  man  may  find  it  necessary  to  borrow  money  with  which  to  pay 
his  current  obligations,  even  though  his  current  assets  may  exceed  his  current  liabilities. 
Such  a  situation  is  generally  due  to  a  temporary  shortage  of  cash.  By  creating  other  liabili- 
ties which  will  mature  at  a  later  date  and  exchanging  these  for  cash,  he  is  thus  enabled 
to  pay  his  current  liabilities.  This  gives  him  time  to  convert  his  receivables  into  cash 
with  which  to  meet  the  newly  created  liabilities. 

This  means  of  financing  is  quite  commonly  employed  for  maintaining  good  credit 
relations  and  also  for  taking  advantage  of  discounts  available  on  purchases  of  merchandise 
or  raw  materials. 

In  case  it  becomes  necessary  to  seek  a  loan,  a  business  man  may  call  on  his  bank  or 
banks  with  which  he  has  money  on  deposit,  or  he  may  call  on  friends  for  financial  aid. 
It  makes  no  difference  from  whom  he  may  wish  to  secure  the  loan,  a  Balance  Sheet  properly 
prepared  will  aid  him  greatly  in  explaining  his  financial  affairs. 

Study  the  following  Balance  Sheet : 


James 

Wilcox 

Balance  Sheet  June  30,  19—. 

Current 

Cash 

Notes  Receivable 

Accounts  Receivable 

Assets 

$  200.00 
3500.00 
9500.00 

Ldabilities  and  Capital 
Current 

Notes  Payable                    $  1 500 .  00 
Accounts  Payable                2250.00 
Accrued  Accounts                  250 .  00 

Mdse.  Inventory 
Accrued  Accounts 

8800.00 
200.00 

$22200.00 

Capital 

Net  Capital— James  Wilcox 

Fixed 

Office  Equipment 
Delivery  Equipment 
Deferred  Charges 

$  750.00 
2250.00 

$  3000.00 
$    400.00 

$25600.00 

$  4000.00 


$21600.00 


$25600.00 


An  examination  of  the  individual  accounts  composing  accounts  payable  shows  that 
they  will  all  mature  within  the  next  20  days.    An  examination  of  the  individual  notes  and 


130 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


accounts  receivable  shows  that,  according  to  past  experience,  about  $1000.00  may  be 
received  from  that  source  within  the  next  20  days,  but  that  upwards  of  $3000.00  may  be 
expected  within  60  days.  Wilcox  has  decided  to  ask  his  bank  to  loan  him  $1500.00  for 
60  days,  since  the  notes  already  outstanding  fall  due  at  a  later  date, — one  for  $1000.00 
matures  in  90  days,  and  one  for  $500.00  matures  in  4  months.  The  cash  now  on  hand 
may  be  needed  for  current  expenses. 

EXERCISE  II 

Prepare  a  Balance  Sheet  showing  the  eflfect  of  the  loan  which  has  been  granted  by  the  bank. 

When  a  business  man  is  seeking  credit  from  concerns  from  which  he  desires  to  make 
purchases  of  goods,  it  is  customary  for  him  to  furnish  them  with  information  concerning 
his  financial  standing,  if  they  are  not  already  familiar  with  it.  Or,  he  may  be  asked  to 
give  this  information  to  certain  credit  agencies  such  as  Dun  or  Bradstreet's. 

It  cannot  always  be  decided  from  the  Balance  Sheet  alone  whether  the  business  is 
worthy  of  credit  or  not.  Many  things  not  appearing  on  the  Balance  Sheet  must  be  taken 
into  consideration,  as  will  be  shown  in  a  following  exercise. 

Note. — ^Attention  is  called  to  the  fact  that  the  expressions  "business,"  "a  business" 
or  "the  business"  is  often  used  instead  of  the  word  "proprietor"  or  the  name  of  the  pro- 
prietor. In  fact,  it  is  important  for  bookkeeping  and  for  other  purposes  to  distinguish 
between  the  proprietor  and  the  business.  It  is  only  in  rare  instances  that  the  Balance 
Sheet  of  a  business  will  show  the  same  results  that  a  Balance  Sheet  or  Statement  of  Assets 
and  Liabilities  will  show  for  the  proprietor  or  proprietors  of  that  business.  In  other  words, 
A  may  be  engaged  in  the  wholesale  hardware  business  and  may  have  an  excellent  system 
of  keeping  his  books.  The  books  may  show  his  net  worth  in  the  business  to  be  $25,000.00, 
and  yet  may  not  reveal  the  ownership  of  any  property  outside  the  business,  while  at  the 
same  time  he  may  own  $10,000  worth  of  property  of  various  kinds,  not  recorded  by  the 
books  of  the  business  nor  used  as  a  part  of  the  capital  of  his  business. 

Study  the  two  Balance  Sheets  following,  first,  by  reading  the  questions  carefully  to 
be  sure  you  understand  them,  second,  by  assuming  that  you  were  trying  to  decide  upon 
extending  credit  to  both  men.  You  will  notice  that  (upon  their  faces)  these  Balance 
Sheets  are  very  much  alike. 


James  Hays 
Balance  Sheet  Dec.  31,  19— 
Cash  $3000.00 

Notes  Receivable  500 .  00 

Accounts  Receivable  2500 .  00 

Mdse.  Inventory  1500.00 


William  Duffy 
Balance  Sheet  Dec.  31,  19—. 
Cash  $  100.00 

Notes  Receivable  3400 .  00 

Accounts  Receivable  1500.00 

Mdse.  Inventory  2500.00 


Total  Current  Assets 
Notes  Payable 
Accounts  Payable 


$1000.00 
1500.00 


Total  Current  Liabilities 


$7500.00 


$2500.00 


Total  Current  Assets 
Notes  Payable 
Accounts  Payable 


$1000.00 
1500.00 


Total  Current  Liabilities 


$7500.00 


$2500.00 


Net  Capital — James  Hays 


$5000.00 


Net  Capital— William  Duffy 


$6000.00 


QUESTIONS   ON  HAYS'S  AND   DUFFY'S  BALANCE  SHEET 

1.  What  is  the  total  capital  employed  in  each  business? 

2.  How  much  of  the  capital  belongs  to  Hays?    To  Duffy?    How  much  to  others? 

3.  Should  either  Hays  or  Duffy  be  allowed  to  take  his  own  capital  before  he  pays  his  creditors?    Why? 


A  STUDY  OF  THE  BALANCE  SHEET  131 

4.  Who,  then,  has  first  claim  upon  the  capital  of  the  business? 

5.  Does  Hays  have  suflficient  "ready  money"  to  pay  his  creditors?    Does  Duffy? 

6.  Is  it  necessary  for  either  business  to  keep  sufficient  cash  on  hand  to  pay  all  its  debts  at  any  given 
time? 

7.  If  either  business  did  not  have  cash  sufficient  to  pay  its  debts,  what  assets  here  given  could  be 
converted  quickly  into  cash? 

8.  What  is  the  ratio  existing  between  the  total  current  assets  and  the  total  current  UabiUties  of  each 
business? 

EXERCISE  III 

Prepare  a  new  Balance  Sheet  for  Duffy  after  taking  into  consideration  the  following  facts: 

1.  Holland  &  Co.,  who  owe  Duffy  $3400.00  on  the  note  receivable,  have  just  gone  into  bankruptcy, 
and  the  note  is  regarded  as  worthless. 

2.  The  inventory  of  merchandise  consists  almost  entirely  of  old-style,  shop-worn  goods.  It  is  estimated 
to  be  salable  at  20%  of  its  inventory  value. 

After  making  allowance  for  the  losses  on  the  notes  receivable  and  the  inventory,  is  Duffy  able  to  pay 
his  creditors,  all  other  accounts  being  considered  good  at  their  book  values? 

EXERCISE  IV 

Prepare  another  Balance  Sheet  for  WiUiam  Duffy  from  the  following  facts: 

1.  It  has  been  determined  that  he  owns  the  house  in  which  he  Uves.  It  is  valued  at  $5000.00  and  is 
free  from  all  encumbrances. 

2.  He  also  owns  $2000.00  in  Liberty  Bonds,  fully  paid. 

3.  After  bringing  the  value  of  his  residence  and  his  investment  in  Liberty  Bonds  into  the  Balance 
Sheet,  is  he  able  to  pay  his  debts? 

4.  Would  you  extend  him  credit,  say,  for  $500.00  worth  of  goods? 

5.  Submit  your  conclusions  in  writing  and  state  why  you  would  or  would  not  extend  him  credit. 

EXERCISE  V 

It  has  been  determined  that  the  notes  and  accounts  receivable  of  James  Hays  are  all  good  at  their 
book  values.  No  notes  or  accounts  are  past  due,  and  his  customers  have  met  their  obligations  promptly. 
His  stock  of  merchandise  is  new,  in  good  condition,  and  readily  salable  for,  at  least,  its  cost  value 

1.  Outside  of  the  capital  employed  in  his  business  he  owns  the  house  in  which  he  lives.  It  is  worth 
$3500.00  and  is  free  and  clear. 

2.  He  owns  an  automobile  worth  $800.00  on  which  there  are  no  claims. 

3.  He  owns  $500.00  in  Liberty  Bonds,  fully  paid. 

Prepare  a  Balance  Sheet  for  Hays  and  include  the  above  facts.  Would  you  extend  him  credit,  say,  for 
$1000.00?  Submit  your  conclusions  in  writing  as  to  the  comparative  worthiness  of  Hays  and  Duffy  for 
a  loan. 

Credit  relations  may  be  affected  by  conditions  not  shown  by  a  Balance  Sheet  and 
by  property  owned  outside  the  business.  It  sometimes  happens  that  the  personal  habits 
or  tendencies  of  the  proprietor  may  affect  questions  of  credit. 

Study  the  following  Balance  Sheet  for  the  purpose  of  deciding  whether  or  not  credit 
shall  be  extended  to  the  business: 

J.  B.  Hoover 
Balance  Sheet  Dec.  31,  19—. 

Cash  $1200.00  Notes  Payable  $1500.00 

Notes  Receivable  2400.00  Accounts  Payable  2000.00 

Accounts  Receivable  2200.00  Net  Capital— J.  B.  Hoover  4800.00 

Mdse.  Inventory  2500.00 

$8300.00  $8300.00 


132  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

EXERCISE  VI 

Prepare  a  revised  Balance  Sheet  for  Hoover  after  taking  into  consideration  the  following  facts: 

1.  He  owns  the  property  in  which  he  Uves,  but  there  is  a  mortgage  on  it  for  $3500.00.  The  property 
is  valued  at  $6000.00.  In  preparing  the  revised  Balance  Sheet  treat  the  mortgage  as  a  liability  and  the 
value  of  the  property  as  an  asset.  It  must  be  understood  that  the  mortgage  is  a  liabiUty  which  must  be 
satisfied  before  other  creditors  could  claim  any  right  to  payment  out  of  money  arising  from  the  sale  of  the 
real  estate.  The  mortgage  may  be  regarded  as  an  illustration  of  a  fixed  liability  and  the  real  estate  as 
another  fixed  asset. 

2.  He  owns  an  automobile,  not  used  in  his  business,  which  cost  $1500.00,  but  there  are  unpaid  purchase 
notes  against  it  to  the  amount  of  $1000.00. 

3.  He  owes  various  stores  on  book  accounts  for  groceries,  provisions,  clothing,  etc.,  for  family  use  to 
the  amount  of  $300.00.    These  places  inform  you  that  he  keeps  his  accounts  fairly  well  paid  up. 

4.  An  investigation  shows  that  his  accounts  receivable  are  made  up  as  follows:  not  due  and  subject 
to  discount  $700.00,  past  due  30  to  90  days  $1100.00,  past  due  more  than  90  days  $300.00,  worthless  $100. 

5.  The  notes  receivable  show  the  following  conditions:  not  due  $1400.00,  past  due  but  probably  worth 
face  value  $800.00,  worthless  $200.00.  Many  of  the  notes  not  due  are  renewals  of  former  notes,  some  of 
which  show  no  payment  to  apply  on  the  principal,  though  the  interest  has  been  paid  and  the  notes  promptly 
renewed. 

6.  The  stock  of  goods  on  hand  is  new,  in  good  condition  and  should,  at  least,  sell  at  cost. 

7.  It  is  well  known  that  he  is  inclined  to  be  extravagant. 

8.  State  in  writing  if  you  consider  it  advisable  to  make  him  a  loan  of  $1000.00.    Give  reasons. 


PROFITS  NOT  ALWAYS  CASH 

Sometimes  a  business  may  have  produced  profits  during  a  fiscal  period,  but  at  the 
end  of  the  period,  when  it  is  desired  to  "draw  out"  the  profits,  there  may  not  be  sufficient 
cash  for  this  purpose.  It  frequently  happens  that  a  business  man  does  not  understand 
accounts  and  accounting  principles  sufficiently  to  know  that  profits  do  not  always  produce 
cash.  He  may  think  that  if  a  business  shows  $5000.00  in  profits,  there  ought  to  be  $5000.00 
in  cash  to  correspond  with  the  volume  of  profits.  This,  however,  is  not  always  the  result; 
in  fact,  it  seldom  is.  In  most  instances,  the  business  is  very  fortunate  if  the  profits  remain 
liquid,  that  is,  remain  in  the  current  assets;  much  less  ought  the  proprietor  to  excpet  that 
the  cash  shall  show  all  the  profits. 

A  business  may  be  prosperous,  entirely  solvent,  and  be  considered  as  in  good  financial 
condition;  yet  it  may,  at  times,  find  itself  very  much  in  need  of  "ready"  cash  with  which 
to  pay  current  expenses  or  current  bills  for  merchandise  and  supplies. 

It  is  difficult  to  determine,  without  making  a  comparison  of  two  or  more  Balance 
Sheets  for  successive  periods,  just  what  has  become  of  profits  and  cash  during  a  particular 
period.  But,  the  business  man  frequently  wants  to  know  what  has  happened  to  his  profits 
and  why  the  cash  has  all  but  disappeared. 

There  are  several  things,  among  which  are  the  following,  that  may  lead  to  a  condi- 
tion of  this  kind:  the  terms  of  sale  to  customers  may  be  too  long;  the  customers  may  not 
be  compelled  to  pay  their  bills  promptly;  the  stock  of  goods  carried  may  be  too  large; 
there  may  be  too  large  an  investment  in  fixed  assets,  etc. 

Study  the  following  Comparative  Balance  Sheet  and  try  to  determine  what  may  have 
caused  the  present  lack  of  cash  with  which  to  meet  maturing  bills. 


A  STUDY  OF  THE  BALANCE  SHEET 


133 


J.  H.  Phillips 
Comparative  Balance  Sheet  Dec.  31 

This  Year 

Last  Year 

Increase 

Decrease 

ASSETS 
Current 
Cash 

Notes  Receivable 
Accounts  Receivable 
Mdse.  Inventory 

Fixed 

Office  Equipment 

Delivery  Equipment 

$      500.00 

2500.00 

8500.00 

12500.00 

2000.00 
4000.00 

$     2500.00 
1500.00 
5500.00 
8000.00 

500.00 
1000.00 

• 

$  30000.00 

$  19000.00 

LIABILITIES  AND  CAPITAL 
Current 
Notes  Payable 
Accounts  Payable 

Capital 

J.  H.  Phillips 

$1500.00 
6500.00 

22000.00 

$2500.00 
1500.00 

15000.00 

$30000.00 

$  19000.00 

EXERCISE  VII 

1.  What  was  the  ratio  between  current  assets  and  current  habilities  last  year? 

2.  What  was  the  ratio  between  current  assets  and  current  habilities  this  year? 

3.  The  total  fixed  investment  last  year  was  what  per  cent  of  the  total  assets?    This  year? 

4.  By  what  per  cent  did  the  total  current  assets  this  year  increase  over  the  total  current  assets  last 
year?     Fixed  assets? 

5.  Which  class  of  assets  is  increasing  the  more  rapidly? 

6.  Phillips  says  that  the  prospects  for  next  year's  business  are  unusually  good.  His  notes  and  accounts 
receivable  are  all  good,  the  stock  of  goods  is  new  and  in  good  condition.  He  explains  the  increase  in  the 
fixed  assets  as  being  demanded  by  an  expanding  business.  He  also  says  that  a  loan  of  $1500.00  for  60  days 
will  carry  him  over  the  present  difficulty  as  the  majority  of  his  accounts  receivable  and  some  of  the  notes 
receivable  will  mature  and  will  be  paid  within  that  time.  He  has  a  very  good  reputation  among  business 
men.     Would  you  recommend  a  loan  to  him?    State  why  fully. 

EXERCISE  VIII 

ft 

Mr.  Phillips  does  not  understand  bookkeeping  very  well  and  has  some  doubts  about 
the  amount  of  his  net  profit  inasmuch  as  the  business  has  but  little  cash.  Prepare  a  sum- 
mary of  the  increase  and  decrease  of  the  accounts  contained  in  the  Comparative  Balance 
Sheet  that  will  prove  the  correctness  of  his  net  profit. 

Arrange  the  summary  in  the  following  form : 


Total  increase  in  assets 

Total  decrease  in  assets 

Net  increase  in  assets 

Total  increase  in  UabiUties 

Total  decrease  in  liabiUties 

Net  increase  in  liabihties 

Net  profit — (Increase  in  capital) 


134  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

A  STUDY  OF  THE  TRADING  AND  PROFIT  AND  LOSS  STATEMENT 
ITS  ARRANGEMENT  TO   CLASSIFY   INCOME   AND  EXPENSES 

A  business  usually  has  some  major  source  of  income;  that  is,  a  hardware  business 
generally  buys  and  sells  hardware  as  its  principal  source  of  profits;  it  may  have,  however, 
other  sources  of  profits.  It  may  sub-let  a  portion  of  its  premises ;  it  may  sell  waste  material ; 
it  may  hire  out  its  delivery  equipment  for  a  portion  of  the  time;  it  may  find  still  other 
sources  of  income  by  engaging  in  ventures  outside  its  regular  channels  of  trade. 

A  good  system  of  accounting  should  classify  properly  these  different  sources  of  income 
to  show  whence  they  are  derived. 

The  Trading  Statement  which  was  prepared  at  the  end  of  Set  IV  shows  the  principal 
accounts  that  usually  affect  the  purchases  and  sales  of  merchandise  in  a  trading  or  mer- 
chandising business.  There  may  be  other  accounts  that  affect  sales  or  purchases,  depend- 
ing upon  the  nature  of  the  business  and  upon  its  size.  It  would  be  almost  impossible  to 
illustrate,  either  by  a  set  of  books  or  simply  as  individual  accounts,  all  the  different  accounts 
that  might  be  found  in  a  trading  business.  But  certain  general  principles  concerning  the 
preparation  of  a  Trading  Statement  should  be  kept  in  mind. 

MAJOR  INCOME  SHOWN  BY  TRADING  STATEMENT 

In  a  trading  business  the  major  income  is  derived  from  the  purchase  and  sale  of  goods. 
Therefore  in  the  preparation  of  a  Trading  Statement,  the  Sales  account  and  all  accounts 
directly  affecting  the  volume  of  sales  should  be  so  arranged  that  they  will  show  the  net 
sales  for  the  current  period. 

The  accounts  commonly  considered  as  affecting  the  volume  of  sales  are  the  following: 
Rebates  and  Allowances  on  Sales,  Freight-Out,  and  Discount  on  Sales.  It  may  be  that 
these  three  accounts  are  not  kept,  but  that  the  items  usually  composing  them  are  charged 
directly  to  the  Sales  account.  If  these  charges  are  handled  in  this  manner,  it  is  easily  seen 
that  the  Sales  account  when  balanced  must  show  the  net  sales,  and  this  balance  should 
appear  as  the  first  item  on  the  Trading  Statement. 

Sometimes  the  manager  or  the  proprietor  of  the  business  wants  to  know  not  only  the 
volume  of  net  sales  but  also  the  volume  of  gross  sales  and  the  amounts  which  have  been 
deducted  from  the  gross  sales.  When  all  this  information  is  desired,  separate  accounts 
should  be  kept  for  the  deductions  from  sales;  but,  if  separate  accounts  are  not  kept  with 
the  deductions,  the  debit  side  of  the  Sales  account  must  be  analyzed  to  determine  the 
nature  of  the  items  composing  it.  These  results,  then,  ought  to  appear  on  the  Trading 
Statement. 

It  is  possible  that  some  business  men  and  some  accountants  may  consider  freight- 
out  not  as  a  deduction  from  the  sales  but  as  a  selling  expense.  In  such  a  case  these  charges 
should  not  appear  on  the  Trading  Statement  but  among  the  selling  expenses  on  the  Profit 
and  Loss  Statement. 

The  next  account  or  group  of  accounts  to  appear  on  the  Trading  Statement  should  be 
the  Purchases  account  or  the  Purchases  account  and  all  those  accounts  directly  affecting 
it.  The  accounts  which  usually  affect  the  Purchases  account  are  the  following:  Inventory 
(at  beginning  of  the  period),  Freight-In,  Discount  on  Purchases,  and  Inventory  (at  close 
of  the  period). 


A  STUDY  OF  THE  TRADING  AND  PROFIT  AND  LOSS  STATEMENT  135 

It  may  be  that  the  freight-in  has  been  charged  directly  to  the  Purchases  account  and 
that  the  discount  on  purchases  has  been  credited  directly  to  the  Purchases  account.  In 
such  a  case,  the  amounts  of  the  freight-in  and  the  amount  of  the  discount  on  purchases 
may  be  determined  by  an  analysis  of  the  Purchases  account.  If  it  is  desired  to  have 
shown  on  the  Trading  Statement  the  gross  purchases,  the  net  purchases,  and  the  cost  of 
goods  sold,  this  may  be  done  as  follows :  add  the  inventory  (at  the  beginning  of  the  period) 
and  the  freight-in  to  the  balance  of  the  Purchases  account,  the  sum  will  be  the  gross  pur- 
chases. From  the  gross  purchases  deduct  the  discount  on  purchases,  and  the  difference 
will  be  the  net  purchases.  From  the  net  purchases  deduct  the  inventory  (at  the  close  of 
the  period),  and  the  difference  will  be  the  cost  of  the  goods  sold.  Now,  if  we  deduct  the 
cost  of  the  goods  sold  from  the  net  sales,  our  difference  will  be  the  gross  profit  or  profit 
from  merchandise  sales. 

This  completes  the  preparation  of  the  Trading  Statement.  This  statement  may  be, 
and  often  is,  found  in  various  forms,  but  the  principles  here  outlined  are  always  applicable 
in  the  preparation  of  this  statement,  regardless  of  its  form  or  regardless  of  the  number 
and  variety  of  the  accounts  composing  it.  However,  in  some  business  houses  the  Dis- 
count on  Purchases  is  regarded  as  an  income.  If  this  practice  is  followed,  this  account 
should  appear  in  the  Profit  and  Loss  Statement  as  an  income,  but  the  tendency  is  to  regard 
the  discount  on  purchases  as  a  deduction  from  the  Purchases  account. 

It  is  probable  that  the  accounts  in  one  business  may  be  named  quite  differently  from 
the  accounts  found  in  another  business  of  exactly  the  same  kind.  The  names  of  the 
accounts,  however,  should  not  defeat  the  application  of  the  principles  just  stated.  The 
accounts  should  be  examined  to  determine  the  functions  of  their  component  parts,  and 
from  the  conclusions  reached  by  such  an  examination  it  is  usually  a  simple  matter  to  decide 
whether  or  not  the  account  under  consideration  is  a  trading  account.  Of  course,  it  must 
be  expected  that  accountants  or  business  men  should  not  always  agree  upon  the  question 
of  whether  a  particular  account  should  be  classed  as  a  trading  account  or  as  a  profit  and 
loss  account;  but  the  differences  existing  are  not  so  great  as  they  are  sometimes  thought 
to  be.  There  is  a  remarkable  similarity  in  both  the  names  of  the  books  and  the  names  of 
the  accounts  used  in  any  one  line  of  business,  as,  for  example,  a  wholesale  business,  no 
matter  what  is  sold  or  where  the  business  is  located. 

Since  the  gross  profits  of  the  business  have  been  determined,  the  next  step  is  to  decide 
which  accounts  are  next  to  be  brought  into  the  Profit  and  Loss  Statement. 

CLASSES  OF  EXPENSES 

The  next  group  of  accounts  to  be  considered  are  those  that  reduce  the  major  income, 
or  those  accounts  that  have  been  accumulated  by  payments  that  should  logically  come  from 
the  gross  profits,  in  short — the  expenses  of  the  business.  Expenses  fall  logically  in  two 
classes:  first,  those  incurred  in  promoting  sales;  second,  those  incurred  in  administering 
the  business,  i.  e.,  the  expenses  incidental  to  a  business  and  without  which  the  business 
could  not  exist.  These  two  groups  of  expenses  may  be  found  under  various  names,  but 
any  change  in  name  would  not  change  the  nature  of  the  expense  or  of  the  account. 

Business  men  have  found  by  experience  that  it  is  possible  to  increase  the  volume  of 
their  sales  by  advertising.  Expenses  incurred  for  the  purposes  of  publicity  or  making  the 
goods  attractive  are,  therefore,  logically  selling  expenses  and  should  be  considered  as  such. 

Expenses  incurred  in  the  operation  or  administration  of  the  business  such  as  rent, 
taxes,  insurance,  etc.,  have  nothing  to  do  with  the  promotion  of  sales  but  are,  in  the  very 


136  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

nature  of  things,  general  and  are,  therefore,  called  general,  or  general  and  administrative 
expenses.  In  a  very  large  business  this  group  of  expenses  is  sometimes  divided  into  two 
groups,  (1)  general  expenses  and  (2)  administrative  expenses;  the  name  in  each  case  is 
suggestive  of  what  the  account  should  contain. 

After  these  expenses  are  deducted,  the  result  is  the  net  profit  arising  from  the  major 
income.  It  may  be  that  this  is  the  only  source  of  income  the  business  has ;  and,  if  this  is 
true,  the  net  income  is  also  the  total  income  and  measures  the  amount  by  which  the  net 
capital  of  the  business  has  been  increased  during  the  fiscal  period. 

OTHER  INCOMES 

If  there  are  other,  or  minor,  sources  of  income,  the  accounts  which  show  this  income 
should  be  included  in  the  Profit  and  Loss  Statement,  so  that  these  amounts  may  be  added 
to  the  net  amount  of  the  major  income.  Thus,  if  there  are  three  accounts  which  show 
minor  sources  of  income,  each  account  should  be  included  in  the  Profit  and  Loss  Statement 
so  that  the  business  man  may  see,  at  a  glance,  just  how  much  income  was  derived  from 
each  source.  Then,  the  total  of  the  minor  incomes  and  the  net  profit  of  the  major  income 
produce  the  total  net  income  of  the  business.  Sometimes  the  minor  incomes  are  grouped 
under  a  separate  heading  as,  "Other  Income."  It  is  also  the  practice  in  some  business 
houses  to  include  minor  income  in  the  Profit  and  Loss  Statement  just  following  the  gross 
profit  from  sales.    But  this  arrangement  has  been  criticized  as  being  illogical. 

By  separating  the  major  and  minor  sources  of  income  it  is  possible  to  make  certain 
reliable  calculations  based  upon  the  ratio  which  exists  between  gross  profit  and  sales,  net 
profit  and  sales,  expenses  and  sales,  etc.  So  if  one  or  all  of  the  minor  sources  of  income 
should  be  cut  off,  the  ratios  obtained  would  not  be  disturbed,  but  would  still  apply  to  the 
major  source  of  income.  A  clear  illustration  of  this  is  found  in  the  case  of  a  business 
which  pays,  say,  $200.00  per  month  rent,  sub-lets  a  portion  of  its  premises  for  $50.00 
a  month,  and  credits  the  rent  account  with  this  income.  Suppose  this  source  of  income 
should  be  suddenly  terminated  and  should  be  permanently  lost  to  the  business,  the  result 
would  be  that  the  ratio  between  the  expenses  and  the  sales  would  be  disturbed  by  some- 
thing that  should  not  affect  it.  As  an  illustration  of  this  principle,  study  the  following 
partly  condensed  Profit  and  Loss  Statement: 


J.  J.  Moore 
Statement  of  Profit  and  Loss 
For  the  year  ended  December  31,  19 — . 
Net  Sales 
Cost  of  Goods  Sold 

$62800.00 
46500.00 

Gross  Profit 

16300.00 

Selling  Expenses 

$6350.00 

General  Expenses 

Office  Salaries 

Rent 

Stationery  and  Printing 

Miscellaneous 

$2050.00 
1800.00 
480.00 
1840.00        6170.00 

12520.00 

Net  Profit 

$  3780.00 

A  STUDY  OF  THE  TRADING  AND  PROFIT  AND  LOSS  STATEMENT  137 

By  investigation,  it  was  determined  that  the  rent  should  have  been  S2400.00,  and 
that  there  was  a  minor  income  produced  by  sub-renting  a  part  of  the  building  for  the 
year  at  SoO.OO  a  month. 

EXERCISE  IX 

Prepare  a  revised  Profit  and  Loss  Statement  which  •will  show  the  correct  amount  of  rent  and  which 
will  show  the  minor  income  as  a  separate  item.  What  per  cent  of  the  gross  profit  was  the  rent  before 
the  statement  was  revised?     What  per  cent,  after  the  statement  was  re\'ised? 

The  general  principles  formulated  in  this  study  of  the  Profit  and  Loss  Statement  should  be  understood 
to  apply  to  any  line  of  merchandising  or  trading  regardless  of  whether  the  person,  firm,  or  corporation  is 
engaged  in  retailing,  wholesaling,  or  jobbing.  In  the  books  of  a  manufacturing  business  a  different  set  of 
accounts  would  be  found  and  different  principles  would  be  encountered ;  the  same  is  also  true  in  the  case 
of  certain  special  types  of  business,  such  as  the  operation  of  theatres,  hotels,  clubs,  etc. 

EXERCISE  X 

1.  (a)  Name  what  you  would  consider  the  principal  source  of  income  in  the  theatre  business,  (b) 
name  other  sources  of  income  for  a  theatre,  (c)  Would  a  theatre  need  a  sales  book  such  as  you  are  familiar 
with?    Why?    (d)  What  are  the  principal  expenses  of  a  theatre?    Make  a  list  of  them. 

2.  (a)  Wh&t  would  you  consider  as  the  major  income  of  a  hotel?  (b)  Name  some  minor  sources  of 
income  in  the  hotel  business,    (c)  Would  a  hotel  need  a  sales  book  such  as  you  are  famiUar  with?    Why? 

3.  What  would  you  consider  as  the  major  income  of  an  automobile  club?  (b)  name  some  of  the  minor 
sources  of  income  of  such  a  club,  (c)  If  a  club  of  this  kind  would  not  need  a  sales  book,  what  kind  of  a 
record  would  it  need  to  serve  a  similar  purpose?  (d)  What  are  the  principal  expenses  of  a  club  of  this 
kind?    (e)  What  might  cause  accounts  receivable  to  appear  upon  the  books  of  a  club? 

4.  Your  class  has  an  organization  for  its  own  benefit  and  charges  a  membership  fee.  Outline  a  simple 
accounting  system  for  the  treasurer  of  the  class. 

5.  Suppose  you  are  a  member  of  a  school  where  the  outside  activities  of  the  school  are  conducted  by 
the  student  body  under  supervision  of  the  faculty.  Outline  a  simple  accounting  system  that  will  show  the 
receipts  and  expenditures  on  account  of  athletic  events,  theatricals,  school  pubhcation,  etc.  (Avoid  too 
much  detail.  Try  to  show  the  different  sources  of  income,  the  expense  incurred  to  produce  each  kind  of 
income,  and  the  net  profit  or  the  net  loss  from  each.) 

6.  Outline  a  simple  accounting  system  for  a  boy  or  girl  who  has  a  newspaper  route  and  delivers  an 
evening  paper  each  day  and  also  delivers  a  magazine  once  each  week.  You  should  be  able  to  determine 
from  your  records  the  total  sales  of  newspapers  and  the  total  sales  of  magazines  for  a  week  or  for  a  month, 
the  profit,  the  balance  of  cash,  and  the  accounts  receivable.  ^ 

A  Suggestion — It  is  a  simple  matter  to  be  able  to  bring  to  class,  for  discussion,  both 
Balance  Sheets  and  Profit  and  Loss  Statements  from  various  kinds  of  business.  These 
may  be  obtained  from  brokerage  offices,  and  often  the  members  of  a  class  may  obtain 
from  various  sources  similar  material  for  discussion. 

A  teacher  may  secure  any  amount  of  this  material  by  writing  to  a  brokerage  house  for 
it  or  by  asking  to  be  placed  upon  the  mailing  list  of  a  brokerage  house.  Life  insurance 
companies  generally  mail  a  report  of  their  affairs,  at  the  end  of  a  fiscal  period,  to  each 
poUcyholder.     These  reports  are  full  of  interesting  information  for  a  student  of  accounting. 

Another  source  of  information  is  the  annual  reports  of  the  governmental  units  prepared 
by  a  city  treasurer,  a  county  treasurer,  or  similar  officials. 

PROFIT  AND   LOSS  STATEMENT  AFFECTED   BY   IMPROPER  ACCOUNTING 

ORAL  EXERCISE  XI 

James  Morton  is  the  proprietor  of  a  wholesale  confectionery  business  which  he  desires  to  sell.  He 
claims  to  have  made  an  annual  profit  from  this  business  of  $6000.00.  He  has  a  very  poor  accounting 
system.  His  books  contain  only  the  personal  accounts,  both  payable  and  receivable,  cash,  and  one  expense 
account.  He  has  never  taken  a  trial  balance.  He  has  agreed  to  allow  you  the  privilege  of  examining  his 
books  so  that  you  may  satisfy  yourself  as  to  the  truth  of  his  statements  in  regard  to  his  profits. 


138 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


1.  How  would  you  determine  the  volume  of  his  sales  for  a  year? 

2.  How  would  you  determine  the  amount  of  goods  he  had  purchased  for  a  year? 

3.  How  would  you  determine  the  amount  of  his  expenses  for  a  year,  or  would  you  assume  that  the 
expense  account  on  his  books  was  correct? 

4.  How  would  you  determine  the  value  of  his  inventory  of  merchandise? 

You  have  completed  the  investigation  of  Morton's  accounts  and  are  somewhat  in 
doubt  as  to  the  correctness  of  the  volume  of  sales  which  you  obtained  as,  $40,000.00;  there 
were  only  a  few  bills,  and  these  showed  that  the  purchases  for  the  year  were  $21,000.00. 
You  are  convinced  that  the  amount  of  the  expense  account,  $5000.00,  as  shown  by  his 
books,  is  correct.  However,  during  the  investigation  you  find  that  the  amount  of  his 
inventory  last  year  was  $7000.00,  and  this  year  it  was  $8000.00. 

EXERCISE  XII 

From  the  facts  just  stated,  prepare  a  Profit  and  Loss  Statement  that  will  either  prove  or  disprove 
your  estimate  of  the  amount  of  the  sales  made. 

It  is  advisable  to  start  with  the  amount  of  the  net  profit  stated  by  Morton  and  to  work  backwards 
'  with  the  Profit  and  Loss  Statement  to  arrive  at  the  volume  of  the  sales. 

The  following  is  a  Profit  and  Loss  Statement  from  the  books  of  J.  H.  Harley.    He  was 

engaged  in  the  coal  business. 

Sales  $45000.00 

Net  Purchases       .  $38000.00 

Inventory  Dec.  31  6000.00 


Cost  of  Goods  Sold 

Gross  Profit 
Expenses 


$32000.00 

$13000.00 
8000.00 


Net  Profit  $  5000.00 

EXERCISE  XIII 

An  investigation  of  the  accounts  disclosed  the  following  facts: 

1.  That  the  Sales  account  included  an  item  of  $500.00  for  the  sale  of  a  truck,  an  item  of  $250.00  for 
the  sale  of  a  horse,  and  an  item  of  $50.00  for  the  sale  of  an  old  wagon. 

2.  The  Purchases  account  included  an  item  of  $2100.00  for  the  purchase  of  a  new  truck. 

3.  That  an  inventory  had  been  taken  of  the  Delivery  Equipment  account.    This  inventory  showed 
an  amount  of  $8500.00,  but  the  account  in  the  ledger  showed  a  balance  of  $11000.00. 

Prepare  a  revised  Profit  and  Loss  Statement  which  will  show  the  net  profit  of  the  business  for  the 
fiscal  year,  after  giving  effect  to  the  necessary  adjustments. 

On  Dec.  31,  1921,  the  Profit  and  Loss  Statement  of  Harding  &  Davis,  who  were 
engaged  in  the  wholesale  flour  and  grain  business,  showed  the  following  results: 

Sales  $58490.00 

Inventory  Dec.  31,  1920  $16500.00 

Net  Purchases  41400.00 


Total  Net  Purchases 
Inventory  Dec.  31,  1921 

Cost  of  Goods  Sold 
General  Expense 
Selling  Expense 

Net  Profit 


$57900.00 
9260.00 

$48640.00 
3850.00 
3280.00 


$  55770 
$  2730.00 


A  STUDY  OF  THE  TRADING  AND  PROFIT  AND  LOSS  STATEMENT 


139 


EXERCISE  XIV 

The  partners  did  not  understand  bookkeeping  but  believed  that  the  net  profits  for  the  year  were  too 
small,  all  things  considered.    They  consulted  an  accountant  and  engaged  him  to  audit  the  books. 
The  audit  revealed  the  following  facts : 

1.  That  in  preparing  the  inventory  on  Dec.  31,  1920,  the  bookkeep)er  had  included  in  the  inventory 
of  merchandise  the  amount  of  the  inventory'  of  the  delivery  equipment  which  was  $3275.00. 

2.  That  the  inventory  of  merchandise  on  Dec.  31,  1921  did  not  include  a  shipment  of  flour  which  was 
in  the  cars  at  the  time  the  inventory  was  taken,  but  that  the  bills  for  the  shipment  had  been  received  and 
properly  entered  in  the  books  during  the  month  of  December.    The  amount  of  the  shipment  was  $2135.00. 

3.  That  on  Oct.  10,  there  had  been  entered  and  charged  to  the  General  Expense  account  a  bill  for 
$250.00  for  a  new  safe  for  the  office. 

4.  That  the  firm  on  Aug.  5,  had  advanced,  as  a  loan,  to  a  salesman  $150.00.  The  bookkeeper  had 
charged  this  amount  to  the  Selling  Expense  account  instead  of  charging  it  to  the  salesman. 

Prepare  a  re\ased  Profit  and  Loss  Statement  after  making  adjustments  for  the  errors  reported.  By 
what  amount  is  the  net  profit  increased  or  decreased?  In  your  opinion,  do  errors  like  those  just  related 
actually  occur  in  business? 

The  following  is  a  Profit  and  Loss  Statement  for  Sheill  &  Read,  prepared  by  their 
bookkeeper  to  show  their  operations  for  the  year  ended  Dec.  31,  1920: 


Sales 

Inventory  Dec.  31,  1919 

Net  Purchases 

Total  Net  Purchases 
Inventory  Dec.  31,  1920 

Cost  of  Goods  Sold 

Gross  Profit 

Administrative  Expense 
General  Expense 
Selling  Expense 

Total  Expense 

Net  Profit 


$12280.00 
60350.00 

$83500.00 

$59450.00 
$24050.00 

18430.00 

100% 

$72630.00 
13180.00 

71.2  % 
28.8  % 

$  7800.00 
4350.00 
6280.00 

9.34% 

5.21% 
7.52% 

$  5620.00 

6.73% 

28.80% 


EXERCISE  XV 


An  investigation  disclosed  the  fact  that  the  follo^N-ing  errors  had  been  made  during  the  year: 

1.  That  the  inventory  of  merchandise  on  Dec.  31,  1920  included  an  amount  of  $780.00  covering  certain 
goods  that  had  been  sold,  billed,  and  the  amount  of  the  bills  included  in  the  sales  for  the  current  year. 
These  goods  were  being  held  pending  orders  as  to  the  place  of  shipment. 

2.  That  the  General  Expense  account  had  been  credited  with  the  rent  received  during  the  year,  which 
amounted  to  $600.00.  The  rent  was  received  entirely  from  allowing  exhibits  and  demonstrations,  for  adver- 
tising purposes,  by  manufactures  of  novel  goods.  The  store  was  not  leased  by  Sheill  &  Read  with  the 
intention  of  sub-leasing  it  as  a  means  of  additional  income. 

3.  The  Selling  Expense  account  had  been  credited  with  the  amount  of  $800.00,  parts  of  which  had  been 
received  at  various  times  during  the  year.  This  sum  was  received  for  use  of  their  delivery  equipment  by 
different  concerns,  though  this  equipment  had  not  been  purchased  with  the  intention  of  hiring  it  out. 

Adjust  the  profit  and  loss  accounts  affected  by  the  facts  stated  in  this  problem  and  show  as  additional 
income  the  amounts  which  have  been  used  to  reduce  expenses. 

Prepare  a  revised  Profit  and  Loss  Statement.  Show  the  percentages  in  the  revised  statement  as  they 
are  shown  in  the  statement  of  the  problem,  and  determine  the  amount  which  these  percentages  are  affected 
by  the  adjustments. 


140  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

HOW  TRANSACTIONS  AFFECT  THE  BUSINESS 

The  bookkeeper  and  the  business  man  should  visuaHze  the  effects  of  each  transaction 
upon  the  business.  The  Balance  Sheet  must,  ultimately,  reflect  both  the  favorable  and 
the  unfavorable  transactions.  It  may  also  be  affected  by  happenings  within  the  business 
which  are  not,  strictly  speaking,  business  transactions. 

The  following  exercise  may  be  worked  either  on  paper  or  on  a  blackboard,  or  a  part 
on  one  and  a  part  on  the  other.  The  effect  of  each  entry  upon  the  Balance  Sheet  should 
receive  particular  attention,  whether  the  entry  results  from  a  transaction  or  from  some 
happening  within  the  business.  In  order  that  this  work  may  be  done  rapidly  and  effec- 
tively, it  is  advisable  to  show  the  accounts  in  skeleton  ledger  form,  or,  as  they  are  sometimes 
called,  T  accounts. 

-  EXERCISE  XVI 

J.  R.  Bowen  began  business  with  the  following  assets,  having,  at  the  time,  no  liabilities: 

Cash  $2000.00 

Notes  Receivable  1 000 .  00 

James  Stillman  1500.00 

Problem  I.  Prepare  an  opening  entry  for  J.  R.  Bowen.  Why  did  you  credit  J.  R.  Bowen  with  the 
amount  of  the  assets?  Is  the  business  indebted  to  Bowen?  Has  Bowen  the  right  to  demand  a  return  of 
the  capital  he  has  put  into  the  business?  Will  the  entry,  when  completed,  produce  the  equivalent  of  both 
a  trial  balance  and  a  Balance  Sheet?    Prepare  the  Balance  Sheet. 

If  Bowen  should  not  buy  an}d;hing,  his  net  capital  would  probably  remain  as  it  is,  unless  he  lost  some 
of  the  money  (cash),  or  unless  some  of  the  debtors  became  unable  to  pay  him. 

Tkansaction  No.  1.  The  debtor  on  the  note  paid  Bowen  the  full  amount,  $1000.00,  and  the  proper 
entry  was  made. 

Problem  II.  Prepare  a  Balance  Sheet  which  shows  the  effect  of  the  entry.  Was  the  capital  of  the 
business  affected?     Was  the  Balance  Sheet  affected? 

Transaction  No.  2.  Stillman  paid  the  amount  due  on  his  account,  $1500.00,  and  the  proper  entry 
was  made  for  the  payment. 

Problem  III.  Prepare  a  Balance  Sheet  which  shows  the  effect  of  this  entry.  Was  the  capita!  of 
the  business  either  increased  or  diminished?     Was  the  appearance  of  the  Balance  Sheet  affected? 

Transaction  No.  3.  Bowen  bought  from  the  Lincoln  Mills  100  bbl.  Flour  @  $8.00  per  bbl.  and 
promised  to  pay  for  it  in  30  days.    The  proper  entry  was  made  to  record  this  purchase. 

Problem  IV.  Prepare  a  trial  balance  and  a  Balance  Sheet  which  show  the  effect  of  this  entry.  Was 
the  capital  of  the  business  increased?  Was  Bowen's  net  capital  increased?  Was  there  any  capital  in  the 
business  besides  Bowen's  capital?     Was  the  appearance  of  the  Balance  Sheet  changed? 

Transaction  No.  4.  Bowen  sold  100  bbl.  Flour  @  $10.00  per  bbl.  to  the  Ward  Baking  Co.  who 
promised  to  pay  him  in  30  days.    The  proper  entry  was  made  to  record  this  sale. 

Problem  V.  Prepare  a  trial  balance  and  a  Balance  Sheet  showing  the  effect  of  this  transaction  and 
entry.  Did  this  transaction  change  the  amount  of  the  capital  in  the  business?  Did  it  change  the  amount 
of  Bowen's  net  capital  in  the  business?  Why  was  Bowen's  capital  affected  by  this  transaction?  Prove 
that  Bowen's  capital  was  increased  or  decreased  by  this  transaction. 

Note. — The  increase  or  the  decrease  of  Bowen's  capital  may  be  proved  in  two  ways:  first,  by  a  Profit 
and  Loss  Statement;  second,  by  the  net  increase  in  assets  over  liabilities  which  may  be  obtained  by  compar- 
ing his  Balance  Sheet  just  preceding  the  transaction  with  the  one  immediately  following  the  transaction. 

Transaction  No.  5.  Bowen  paid  rent,  in  cash  for  one  month,  which  amounted  to  $50.00.  The 
proper  entry  was  made  for  this  payment. 

Problem  VI.  Prepare  a  trial  balance  and  a  Balance  Sheet  after  giving  effect  to  the  entry.  Was 
the  capital  of  the  business  affected  by  this  transaction?  Was  Bowen's  capital  affected  by  this  transaction? 
Prove  your  answers  to  these  two  questions. 

It  has  been  clearly  demonstrated  by  the  preceding  transactions  and  problems  that 
certain  transactions  affect  the  Balance  Sheet.    Similar  transactions  and  problems  could 


ACCOUNTING  DEVICES  AND  MECHANICAL  APPLIANCES  141 

be  continued  almost  indefinitely  by  assuming  different  facts;  and  if  the  teacher  desires  to 
devote  further  time  to  the  study  of  the  effects  of  individual  transactions  upon  the  Balance 
Sheet,  there  still  remain  several  types  of  transactions  for  this  purpose. 

However,  it  should  be  remembered  that  the  business  is  affected  by  the  transaction, 
not  the  entry.  The  entry  merely  records  such  effects  in  a  more  or  less  formal  way,  so 
that  if  the  entry  is  not  properly  made,  the  condition  of  the  business  shown  by  the  books 
is  false. 

ACCOUNTING  DEVICES  AND  MECHANICAL  APPLIANCES 

You  have  studied  thus  far  the  construction,  meaning  and  application  -of  certain 
accounts — the  principal  accounts  of  a  mercantile  business.  You  have  studied,  also,  the 
principal,  special  books  of  original  entry.  Consequently,  you  should  now  be  capable  of 
appreciating  the  various  devices  used  by  accountants  to  save  time,  to  divide  the  work 
among  departments,  to  secure  important  business  data,  etc. 

Chief  among  these  devices  are  special  columns  in  books  of  original  entry,  ledgers 
subsidiary  to  the  general  ledger,  books  for  memorandum  entries,  and  loose  leaf  books. 

These  devices  together  with  the  various  mechanical  appliances  for  office  work,  such 
as  billing  machines,  comptometers,  adders,  etc.,  have  resulted  in  greatly  increasing  the 
volume  of  work  done  by  one  person  and,  at  the  same  time,  they  have  largely  reduced  the 
drudgery  of  office  work. 

If  these  accounting  devices  and  mechanical  appliances  were  suddenly  eliminated 
from  the  modern  business  office,  it  would  be  impossible  to  calculate  the  additional  expense 
that  their  elimination  would  entail.  In  fact,  large  business  organizations  would  be  almost 
impossible. 

SPECIAL  COLUMNS 

It  has  already  been  seen  that  the  use  of  special  books  of  original  entry  saves  time 
in  recording  the  entries  for  certain  transactions  because  of  the  number  of  similar  transac- 
tions, common  to  almost  any  business,  that  may  be  entered  in  each  of  these  special  books. 

By  the  use  of  special  columns  in  books  of  original  entry,  the  amounts,  for  all  entries 
of  the  same  kind,  may  be  gathered  in  one  column  and  posted  as  one  amount;  thus  saving 
time  in  posting.  The  posting  of  one  amount  instead  of  several  also  saves  space  in  the  ledger, 
so  that  one  ledger  page  is  sometimes  used  for  several  months,  or  even  years,  for  one  account. 

The  posting  from  special  columns  is  similar  to  the  posting  from  special  books,  inas- 
much as  the  totals  are  transferred  to  the  account  indidated  by  the  name  of  the  column. 

Another  valuable  feature  of  special  columns  is,  that  they  often  enable  the  bookkeeper 
to  test  the  correctness  of  the  entries  and  of  the  totals  for  a  month's  work  before  the  totals 
are  posted. 

The  use  of  special  columns  may  be  summarized  as  follows : 

Purpose.  To  save  time  in  making  entires,  and  in  posting  the  entries  at  the  end  of 
a  month  or  other  fiscal  period. 

Method.  Each  special  column  should  bear  a  heading,  which  should  be  the  same  as 
that  of  the  account  to  which  the  individual  items  in  the  column  should  be  posted,  if  not 
posted  as  a  total.  The  amounts  of  the  entries  in  each  column  are  totaled  to  determine  the 
aggregate  charge  or  credit  to  that  particular  account,  originating  from  entries  recorded  in 
that  book. 


142 


LYONS'  BOOKKIEPING  AND  ACCOUNTING 


RECEIPTS 


Date 

LF 

Foot 
Ball 

Basket 
Ball 

Base 
Ball 

General 

Sep. 

22 
29 

Sale  of  tickets 

u       u          u 

40 
45 

00 
00 

Nov. 

6 

u       u          u 

42 

00 

Jan 

4 
11 
18 

u       u         u 
u       u         a 
u       u          u 

30 
40 
37 

00 
00 
00 

May 

10 
17 
22 

u       u          u 
u       u         u 

Theatricals 

Advertising  space 

15 
21 

00 
00 

20 

00 

25 

Theatricals 

Sale  of  tickets 

36 

00 

65 

270 

00 

127 

00 

107 

00 

00 

355 

00 

Posting.  The  total  of  each  special  column  is  posted  to  the  proper  side  of  the  proper 
account,  which  is  usually  indicated  by  the  heading  of  the  column. 

Quite  frequently  the  word  "general"  is  used  as  a  heading  for  a  column  in  some  book 
of  original  entry.  As  a  rule,  a  column  so  headed  is  not  a  special  column  but  is  what  the 
name  implies — a  general  column.  Such  a  column  is  used  for  the  amounts  of  entries  that 
can  not  properly  be  placed  in  the  special  columns.  Then,  too,  the  amounts  in  such  a 
column  are  usually  posted,  individually,  to  the  proper  account  or  accounts. 

There  is  no  particular  limit  to  the  use  of  special  columns.  Indeed,  in  many  offices, 
books  are  used  having  as  many  as  thirty  or  forty  special  columns.  Sometimes  books  of 
this  size  are  rather  cumbersome  and  difficult  to  handle. 

SPECIAL  COLUMNS   IN  A   CASH   BOOK 

Any  or  all  books  of  original  entry  may  contain  special  columns.  In  a  cash  book, 
special  columns  may  be  used  to  classify  both  receipts  and  expenditures  of  money  according 
to  some  plan  convenient  for  the  accounting  system. 

Study  the  preceding  illustration  of  a  cash  book  which  may  be  used  by  a  school  to 
record  the  receipts  and  expenditures  on  account  of  its  different  activities. 

The  amounts  and  entries  contained  in  this  cash  book  are  posted  as  follows: 
Foot  Ball  Basket  Ball  Base  Ball 


35.00 


127.00 


80.00 


107.00 


22.00 


36.00 


Theatricals 


Cash 


14.00 
22.00 


20.00 
65.00 


335.00 


153.00 


ACCOUNTING  DEVICES  AND  MECHANICAL  APPLIANCES 

EXPENDITURES 


143 


Foot 

Basket 

Base 

Date 

LF 

Ball 

Ball 

Ball 

General 

Sep. 

27 

Union  Printing  Co. 

tickets 

5 

00 

27 

OflBcials  for  game 

10 

00 

Oct. 

2 

Officials  for  game 

10 

00 

Nov. 

10 

Officials  for  game 

• 

10 

00 

Jan. 

25 
27 
29 

Officials  for  games 
Union  Printing  Co. 
WilUams  &  Co. 

3  games 

tickets 

Uniforms 

15 

5 

60 

00 
00 
00 

May 

20 

27 

Officials  for  games 
Theatricals 

Programs 

10 

00 

14 

00 

29 

Theatricals 

Costume  rent 

12 
22 

00 
00 

22 
137 

00 

35 

00 

80 

00 

00 

^ 

^= 

= 

= 

173 

00 

Balance 

182 

00 

• 

355 

00 

=^^ 

This  simple  illustration  shows  the  use  that  may  be  made  of  special  columns  in  a  cash 
book  and  the  convenience  of  special  columns  for  posting. 


SPECIAL  COLUMNS   IN  A  PURCHASES  BOOK 

Special  columns  may  be  introduced  into  a  purchases  book  to  show  the  total  purchases 
for  particular  departments  of  a  business;  to  make  charges  to  particular  accounts,  or  to  be 
used  for  both  these  purposes  in  one  book. 

A  business  maintaining  departments  may  use  a  purchases  book  similar  to  the  following: 


PURCHASES 


Date 

LF 

Groceries 

Clothing 

Meats 

Total 

Sep. 

1 

Armour  &  Co. 

1/10,  n/30 

50 

00 

100 

00 

150 

00 

5 

Western  Grocery 
House 

2/10,  n/60 

•  100 

00 

100 

00 

10 

Crowley  Brothers 

2/10,  n/30 

200 

00 

200 

00 

16 

Armour  &  Co. 

n/30 

75 

00 

75 

00 

20 

Western  Grocery 
House 

2/10,  n/60 

300 

00 

300 

00 

25 

Crowley  Brothers 

1/10,  n/30 

100 

00 

100 
925 

00 

450 

00 

300 

00 

175 

00 

00 

144 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


The  total  of  each  special  column  is  the  amount  purchased  during  the  period  for  that 
department  of  the  business.  The  total  purchases  for  the  month  are  $925.00,  which  is  also 
the  total  amount  of  liabilities  incurred  from  that  source.  If  it  is  desired,  additional  columns 
may  be  provided  for  the  purchases  book,  and  these  columns  may  be  used  to  show  the  pur- 
chases, chargeable  to  expense,  made  for  each  department.  These  expenses  may  include 
the  charges  for  such  articles  as  wrapping  paper  and  twine,  cardboard  boxes,  etc. 

In  some  business  houses,  all  bills  for  purchases  whether  or  not  an  account  is  opened 
with  the  creditor,  are  recorded  in  a  book  similar  to  the  purchases  book  here  illustrated. 
This  is  done  to  determine  the  amount  of  the  accounts  payable  for  each  fiscal  period. 

The  following  accounts  show  the  results  of  posting  the  illustrative  purchases  book: 


Groceries 


Clothing 


Meats 


Accounts  Payable 


450.00 


300.00 


175.00 


925.00 


A  ledger  sometimes  becomes  too  large  because  of  the  great  number  of  accounts  which 
it  contains.  When  this  happens,  it  is  the  practice  to  remove  from  the  ledger  certain 
classes  of  accounts,  say,  the  personal  accounts  payable,  and  to  place  them  in  another  ledger 
which  is  commonly  called  the  accounts  payable  ledger. 

Thus,  in  the  above  illustrative  posting,  the  total  ($925.00)  is  posted  to  an  account 
called  Accounts  Payable.  This  account  is  kept  in  the  same  ledger  with  the  accounts 
headed:  "Groceries,"  "Clothing,"  "Meats."  If  the  amounts  due  the  creditors  are  posted 
to  the  personal  accounts,  which  are  in  the  accounts  payable  ledger,  the  total  of  these 
accounts  must  be  the  same  as  the  total  of  the  Accounts  Payable  account  which  is  shown 
above. 

When  the  amounts,  which  affect  the  personal  accounts  payable,  are  posted  from  the 
purchases  book,  these  personal  accounts  will  stand  (in  an  accounts  payable  ledger)  as 
follows : 


Armour  &  Co. 


Crowley  Brothers 


Western  Grocery  House 


150.00 
75.00 


200.00 
100.00 


100.00 
300.00 


It  will  be  seen  that  the  total  of  all  these  personal  accounts  ($925.00)  is  equal  to  the 
total  of  the  Accounts  Payable  account  which  is  contained  in  the  general  ledger. 


SPECIAL  COLUMNS   IN  A  SALES  BOOK 

In  a  sales  book  special  columns  are  frequently  used  to  show  sales  by  departments,  by 
certain  salesmen,  in  certain  territories,  or  sometimes  all  three  of  these  results  may  be 
shown  in  one  book. 

The  following  illustration  shows  how  a  sales  book  may  be  used  to  distribute  sales 
according  to  the  different  departments  of  a  business: 


ACCOUNTING  DEVICES  AND  MECHANICAL  APPLIANCES 


145 


SALES 


Date 

LF 

Hard- 
ware 

Painters' 
Supplies 

Glass 

Total 

June     1 

5 

10 

14 

20 

Union  Bldg.  Co.               2/10,  n/30 
Brown  &  Sons                   2/10,  n/30 
Holmes  Realty  Co.           2/10,  n/30 
Brown  &  Sons                   2/10,  n/30 
Holmes  Realty  Co.           2/10,  n/30 

50 

100 

50 

00 
00 
00 

100 
200 

50 
125 

00 
00 

00 
00 

40 

150 
25 

00 

00 
00 

190 
200 
250 
75 
175 

00 
00 
00 
00 
00 

200 

00 

475 

00 

215 

00 

890 

00 

Note. — The  items  composing  each  sale  have  been  omitted,  in  order  to  make  the  illustration  brief. 
The  amount  of  the  sales  made  by  each  salesman  may  be  determined  by  providing 
a  column  for  each  salesman  and  extending  the  sales  made  by  each  into  the  proper  column. 
Furthermore,  the  amount  of  the  sales  for  certain  territories  may  be  determined  in  a  similar 
manner.  However,  the  sales  book  may  become  unwieldy  if  too  many  columns  are  pro- 
vided; therefore,  it  is  often  necessary  to  prepare  a  recapitulation  of  the  sales  book,  in 
order  to  determine  some  of  the  information  which  may  be  desired  by  the  management. 
The  following  accounts  show  the  results  of  posting  the  illustrative  sales  book: 


Hardware 


Painters'  Supplies 


Glass 


Accounts  Receivable 


200.00 


475.00 


215.00 


890.00 


When  a  business  sells  its  goods  on  credit,  the  personal  accounts  receivable  generally 
outnumber  any  other  class  of  accounts.  Therefore  it  is  a  common  practice  to  remove 
these  accounts  and  to  place  them  in  a  special  ledger  called  the  accounts  receivable  ledger. 
If  this  is  done,  the  total  of  all  amounts  posted  to  the  personal  accounts  in  this  ledger  must 
equal  the  amount  posted  to  the  Accounts  Receivable  account  in  the  general  ledger. 

When  the  amounts  which  affect  the  personal  accounts  receivable  are  posted  individually 
(in  an  accounts  receivable  ledger)  these  accounts  will  stand  as  follows: 


Union  Building  Co. 


Brown  &  Sons 


Holmes  Realty  Co. 


190.00 


200.00 
75.00 


250.00 
175.00 


If  the  amounts  which  are  posted  to  these  accounts  are  added  it  will  be  seen  that  the 
total  will  agree  with  the  total  ($890.00)  which  has  been  charged  to  the  Accounts  Receivable 
account  in  the  general  ledger. 


SPECIAL  COLUMNS   IN  A  JOURNAL 


A  journal  also  may  have  its  special  columns,  and  it  usually  does  have  them  in  a  busi- 
ness that  has  a  well  organized  accounting  system.  The  headings  of  the  columns  of  a 
journal,  in  that  event,  are  usually  determined  by  the  uses  of  the  special  books  of  original 


146  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

entry  and  by  the  number  and  kinds  of  ledgers  used;  but,  it  is  well  to  have  both  a  debit 
and  a  credit  column  for  each  ledger,  in  which  to  enter  amounts  that  affect  the  accounts 
in  the  different  ledgers.  That  is,  if  there  are  three  ledgers  in  use,  the  journal  should,  as 
a  rule,  contain  six  columns,  thus,  there  would  be  one  debit  and  one  credit  column  for 
each  ledger. 

SUBSIDIARY  LEDGERS 

When  more  than  one  ledger  is  used,  there  must  be  some  way  of  distinguishing  the 
different  ledgers,  and  of  distinguishing  the  accounts  which  properly  belong  in  each  ledger. 
This  is  usually  done  by  giving  a  special  name  to  the  ledger  containing  a  particular  class  of 
accounts;  thus,  by  this  plan  the  ledger  which  contains  all  the  personal  accounts  receivable 
is  called  the  Accounts  Receivable  Ledger.  The  ledger  which  contains  all  the  personal 
accounts  payable  is  called  the  Accounts  Payable  Ledger,  and  the  ledger  from  which  the 
accounts  receivable  and  the  accounts  payable  have  been  removed  is  called  the  General 
Ledger. 

Sometimes  the  expense  accounts  are  removed  from  the  general  ledger,  and  are  kept 
in  a  separate  ledger  which  is  called  the  Expense  Ledger. 

These  special  ledgers  are  known  as  subsidiary,  or  auxiliary,  ledgers,  and  sometimes 
they  are  known  as  controlled  ledgers. 

If  the  balances  of  ail  the  accounts  which  are  contained  in  a  subsidiary  ledger  are  added, 
the  total  will  agree  with  the  balance  of  an  account  which  bears  the  name  of  the  subsidiary 
ledger  and  which  is  contained  in  the  general  ledger.  The  account  which  bears  the  name 
of  the  subsidiary  ledger  is  said  to  control  that  ledger.  Hence,  such  accounts  are  commonly 
known  as  controlling  accounts. 

ACCOUNTS  PAYABLE  LEDGER 

In  almost  any  business  that  sells  on  credit,  the  accounts  payable  are  few  in  number, 
as  compared  with  the  number  of  accounts  receivable  of  the  same  business.  Yet  it  is  often 
found  convenient  to  have  an  account  with  each  creditor  in  a  separate  ledger.  Such  a 
ledger  is  commonly  called  an  accounts  payable  ledger,  creditors'  ledger,  or  purchase  ledger. 
It  is  very  seldom  that  use  is  found  for  more  than  one  ledger  for  accounts  payable. 

The  sum  of  the  balances  of  all  accounts  in  this  ledger  should  agree  with  the  balance 
of  Accounts  Payable  account  in  the  general  ledger. 

The  accounts  payable  ledger  may  be  known  also  as  the  purchases  ledger  or  creditors' 
ledger. 

ACCOUNTS   RECEIVABLE  LEDGER 

It  has  already  been  stated  that  when  a  business  adopts  the  policy  of  selling  on  credit, 
it  is  necessary  to  open  an  account  with  each  person,  firm,  or  corporation  to  which  a  sale 
has  been  made  on  credit.  The  customers  may  be  few  or  they  may  be  many;  but,  some- 
times there  are  hundreds  or  thousands  of  them.  The  number  of  customers  may  be  so 
great  that  it  would  be  inconvenient  to  have  one  book  large  enough  to  contain  accounts 
with  all  of  them.  Therefore,  instead  of  providing  one  subsidiary  ledger,  several  such 
ledgers  may  be  used  for  the  customers'  accounts. 

Some  of  the  larger  mercantile  houses  divide  their  accounts  receivable  according  to 
the  territory  served  by  the  house,  and  name  the  ledgers  to  indicate  the  general  location  of 
the  customers.   Thus,  there  may  be  a  city  ledger,  in  which  accounts  are  kept  for  all  customers 


SUBSIDIARY  LEDGERS  147 

located  in  the  city;  and  a  country  ledger  in  which  accounts  are  kept  for  all  customers  out- 
side the  city.  Sometimes  a  foreign  ledger,  or  export  ledger,  may  be  used  for  customers  in 
a  foreign  country. 

An  electric  light  company  must  have  an  account  with  each  user  of  electricity;  there- 
fore, in  cities  hke  New  York  or  Chicago  these  accounts  number  by  thousands.  In  such 
cases  it  is  evident  that  some  method  must  be  devised  of  subdividing  the  accounts  receivable 
into  several  different  groups.  This  may  be  done  by  dividing  the  city  into  districts  and 
providing  one  ledger  for  all  customers  in  each  district;  or,  it  may  be  done  by  arranging  the 
names  of  all  customers  alphabetically,  and  by  dividing  the  Ust  of  names  into  as  many 
groups  as  may  be  convenient;  then,  for  each  group  of  names,  one  ledger  should  be 
provided;  etc. 

The  accounts  receivable  ledger  may  also  be  known  as  the  customers'  accounts  ledger 
or  as  the  sales  ledger. 

EXPENSE  LEDGER 

In  certain  lines  of  business,  particularly  manufacturing  and  utilities,  there  are  a  great 
many  expense  accounts.  Frequently,  all  these  accounts  are  placed  not  in  the  general 
ledger,  but  in  a  subsidiary  ledger  known  as  an  expense  ledger.  The  sum  of  the  balances 
of  all  such  accounts  should  agree  with  the  balance  of  the  Expense  account  in  the  general 
ledger. 

In  its  use  and  operation  an  expense  ledger  does  not  differ  from  the  other  subsidiary 
ledgers.  The  use  of  an  expense  ledger  is  not  so  common  as  the  use  of  accounts  receivable 
and  accounts  payable  ledgers. 

CONTROLLING  ACCOUNTS 

When  a  subsidiary  ledger  is  used,  there  should  be  an  account  in  the  general  ledger 
the  title  of  which  corresponds  to  that  of  the  subsidiary  ledger.  Thus,  if  all  customers' 
accounts  are  carried  in  a  subsidiary  ledger  there  should  be  an  account  in  the  general  ledger 
known  as  Customers  Accounts,  Accounts  Receivable  or  Sales  Ledger  Accounts,  the  balance 
of  which  is  equal  to  the  total  of  the  balances  of  all  accounts  which  are  contained  in  the 
accounts  receivable  ledger. 

Likewise,  if  all  accounts  payable  are  kept  in  a  subsidiary  ledger,  there  should  be  an 
account  in  the  general  ledger  known  as  Accounts  Payable  or  Purchase  Ledger  Accounts, 
the  balance  of  which  is  equal  to  the  total  of  the  balances  of  all  accounts  which  are  contained 
in  the  accounts  payable  ledger. 

A  controlling  account,  for  a  particular  class  of  accounts,  is  established  by  posting  to 
the  general  ledger,  the  aggregate  of  all  entries  (in  each  book  of  original  entry)  that  affect 
that  class  of  accounts.  Thus,  to  establish  a  controlling  account  for  accounts  receivable, 
it  is  necessary  to  post  to  the  debit  side  of  this  account  in  the  general  ledger,  the  aggregate 
of  all  debit  entries  (in  the  books  of  original  entry)  that  are  posted  individually  to  the  various 
accounts  in  the  accounts  receivable  ledger.  Similarly,  it  is  necessary  to  post  to  the  credit 
side  of  this  account  in  the  general  ledger  the  aggregate  of  all  credit  entries  (in  the  books  of 
original  entry)  that  are  posted  individually  to  the  various  accounts  in  the  accounts  receiv- 
able ledger.  The  controlling  account  for  accounts  payable  is  established  in  a  similar 
manner. 

The  same  result  may  be  obtained  without  the  use  of  special  columns,  by  posting 
(twice)  the  amount  of  each  entry  that  affects  the  accounts  receivable;  once  to  the  accounts 


148 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 

NOTES 


Date 

Issued 


Our 
No. 


Maker  or  Acceptor 


In   Favor  of 


Where  Payable 


Given  for 


Date  of 
Paper 


receivable  ledger,  and  once  to  the  Accounts  Receivable  account  in  the  general  ledger. 
But,  by  the  use  of  special  columns  in  the  books  of  original  entry  for  each  class  of  accounts 
for  which  a  controlling  account  is  to  be  established,  considerable  time  is  saved  in  posting 
the  work  at  the  end  of  a  fiscal  period.  Furthermore,  since  the  use  of  special  columns 
segregates  all  the  entries,  which  affect  a  particular  class  or  group  of  accounts,  it  follows 
that  any  errors  which  may  occur  in  such  a  class  or  group  of  accounts  are  more  easily  located ; 
because  it  is  not  necessary  to  look  for  the  error  or  errors  outside  the  particular  class  or  group 
that  is  affected.  This  means  that  the  ultimate  result  of  the  use  of  controlling  accounts  is 
to  simplify  the  work  rather  than  to  complicate  it. 

The  use  and  operation  of  a  controlling  account  is  really  not  a  new  principle  of  book- 
keeping, but  rather,  a  device  for  entering  and  for  posting  the  entries  (with  which  the  student 
is  already  familiar)  from  books  of  original  entry. 

BOOKS  FOR  MEMORANDUM   ENTRIES 

Almost  every  business  has  certain  books  in  connection  with  the  accounting  system 
that  do  not  perform  the  functions  of  books  of  original  entry ;  nor  do  these  books,  as  a  rule, 
have  any  part  in  the  general  scheme  of  "double  entry"  bookkeeping.  Of  course,  any  one 
or  all  of  them  may  in  some  form,  be  made  a  part  of  the  books  of  original  entry  and  thereby 
become  a  part  of  the  "double  entry"  scheme.  But  such  books  are  generally  used  for 
memorandum  entries  only.  The  most  common  kinds  of  memorandum  books  are  the 
following:  notes  receivable  and  notes  payable  books,  insurance  records,  store  or  stock 
records,  time  records  for  employees,  and  the  various  forms  used  for  keeping  costs. 

The  notes  receivable  book  should  contain  a  record  (the  history)  of  each,  individual 
note  that  comes  into  the  business.  The  balance  of  this  book  should  always  agree  with 
the  balance  of  the  Notes  Receivable  account.     Such  a  record  for  notes  is  particularly 

NOTES 


Date 
Received 


Our 
No. 


Maker  or  Acceptor 


In   Favor  of 


Where  Payable 


Received  for 


Date  of 
Paper 


SUBSIDIARY  LEDGERS 

PAYABLE 


149 


Rate 

of 

Int. 

When  Due 

Amount 

Amount 

of 
Interest 

Total 

Redeemed 

Time 

Year 

c3 

•-5 

X! 

a 

a; 

C 

3 
•-5 

3 

< 

a 
CO 

-4J 

i 

^ 

6 
G 

When 

How 

desirable  in  certain  kinds  of  business  in  which  it  is  the  custom  to  sell  goods  on  notes;  other- 
wise, the  record  is  unnecessary.  Dealers  in  agricultural  implements,  machinery,  auto- 
mobiles, etc.,  generally  do  a  large  proportion  of  their  business  on  notes,  and,  therefore, 
find  a  record  of  this  kind  almost  indispensable. 

The  notes  payable  book  should  contain  a  record  of  each  individual  note  issued  by 
the  business.  The  total  of  the  unpaid  notes  as  shown  by  this  book  should  agree  with  the 
total  of  the  Notes  Payable  account  in  the  general  ledger. 

INSURANCE  RECORD 


Policy  No. 


Company 


Premium 


Date  of  Policy 


Term 


Expiration 


Amount 


Remarks 


The  insurance  record  should  contain  the  history  of  each  insurance  poUcy  issued  to 
(he  business,  and  should  show,  at  least,  the  number  of  the  policy,  the  name  of  the  company 
using  it,  the  amount  of  the  premium  paid,  the  date  of  the  policy,  the  time  for  which  the 
policy  was  issued,  the  date  of  expiration,  the  amount  of  the  policy,  and  the  character  of 
the  risk  assumed.  From  a  record  of  this  kind  it  is  a  simple  matter  to  determine  the  amount 
of  the  unexpired  insurance  at  the  end  of  a  fiscal  period. 


RECEIVABLE 


Rate 

of 

Int. 

When  Due 

Amount 

Amount 

of 
Interest 

Total 

Disposed  of 

Time 

Year 

c 

ej 

>-> 

J2 

(A 

a. 
< 

^ 

^ 

c 

3 

>-3 

<-> 

3 
< 

a 

O 

> 
o 

6 
Q 

When 

How 

150 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 

STORES  LEDGER 


Date 


Quantity 
Received 


Order  No. 


Quantity 
Sold 


Balance  on 
Hand 


Price 

per  Unit 


Value 


A  stores,  or  stock  record  sometimes  called  a  stores  ledger,  or  stock  ledger,  should 
contain  a  record  or  an  account,  with  each  kind  of  merchandise  purchased.  Stores  records 
usually  become  voluminous  in  a  large  business  and  require  a  great  deal  of  attention.  The 
keeping  of  these  records  is  a  source  of  a  large  amount  of  expense  in  any  business  in  which 
they  are  necessary.  It  is  from  such  records  that  a  perpetual,  book,  or  going  inventory 
may  be  taken.  These  records  should  show,  at  least,  the  quantity  of  each  kind  of  goods 
on  hand  at  beginning,  the  quantities  purchased,  and  the  quantities  taken  from  the  stores, 
or  stock, — thus  dealing  with  quantities  only.  The  total  of  the  balances  of  all  the  accounts 
should  agree  with  the  amount  of  the  inventory  at  any  time. 

The  time  records,  or  time  book,  should  contain  the  daily  time  of  each  employee; 
the  total  time;  the  rate  of  pay  per  day,  week,  or  month,  and  the  total  amount  due  at  the 
end  of  each  pay  period.  There  are  so  many  methods  and  devices  employed  for  keeping 
time  records  and  making  up  pay  rolls  that  the  space  required  for  their  treatment  can  not 
be  spared  in  this  textbook. 

Cost  records  vary  in  each  kind  of  business  such  as  wholesaling,  retailing,  manufactur- 
ing, etc.  This  variation  is  due  to  the  different  elements  of  cost  that  must  be  considered  in 
each  kind  of  business  or  in  each  individual  business  of  a  given  kind. 

Every  well-stocked  library  contains  special  books  which  deal  with  cost  finding  and 
cost  records  in  almost  any  kind  of  business,  and  such  books  may  be  found  beneficial  in  a 
more  extensive  study  of  cost  accounting  in  particular  kinds  of  business. 

LOOSE-LEAF  BOOKS 

Any  book  or  record  essential  to  a  business  office  may  be  in  loose-leaf  form,  or  it  may  be 
that  the  individual  sheets  are  bound  together  and  thus  form  what  is  commonly  called  a 
bound  book. 

In  some  instances  a  loose-leaf  book  may  be  more  suitable  than  a  bound  book,  while 
in  others  a  bound  book  may  be  more  suitable.  This  must  be  decided  by  the  needs  of  the 
business  and  the  wishes  of  the  management. 

Another  device,  which  may  be  classed  as  a  loose-leaf  book,  is  the  card  ledger.  It 
consists  of  cards  which  are  cut  in  an  appropriate  size  and  ruled  in  ledger  form.  These 
cards  may  be  used  for  keeping  any  account,  but  they  are  generally  used  for  keeping  the 
personal  accounts  receivable  and  for  keeping  the  stores  accounts. 

However,  the  form  of  the  books  does  not  change  the  principles  applicable  to  the 
keeping  of  the  books;  therefore,  the  term  "loose-leaf"  applies  only  to  the  construction  of 
the  books,  and  not  to  the  methods  by  which  they  are  kept. 


SET  V— AUTOMOBILE  AGENCY— ONE  MONTH  161 

MECHANICAL  APPLIANCES 

The  labor  required  in  recording  the  affairs  of  a  modern  business  has  been  reduced  by 
the  use  of  such  machines  as  the  typewriter,  adder,  comptometer,  recording  clocks,  etc., 
yet  the  need  for  a  knowledge  of  the  principles  of  bookkeeping  has  not  been  reduced. 

To  use  many  of  these  appliances  effectively,  the  operator  must  be  familiar  with  the 
fundamental  principles  of  bookkeeping. 

SET  V— AUTOMOBILE  AGENCY— ONE  MONTH 

James  Armstrong  and  C.  0.  Miller  have  formed  a  partnership  for  the  sale  of  auto- 
mobiles. They  have  obtained  from  the  Douglas  Motor  Co.  an  agency  for  the  sale  of  that 
company's  products  in  Columbus,  Ohio. 

The  firm  is  to  be  known  as  Armstrong  &  Miller,  and  they  have  leased  a  building  at 
324  West  Broad  St.,  in  which  will  be  located  the  office,  sales  rooms,  and  stock  rooms  of  the 
firm.  The  lease  is  for  a  period  of  five  years  and  permits  the  firm  to  remodel  the  building 
in  such  manner  that  it  will  be  suitable  for  their  purposes. 

The  partners  are  to  invest  as  follows:  Armstrong,  $15,000.00,  and  Miller,  $5,000.00. 
Each  partner  is  to  be  allowed  interest  at  6%  upon  his  net  investment,  and  is  also  to  be 
allowed  a  salary  of  $250.00  per  month;  both  interest  and  salary  are  to  be  credited  at  the 
end  of  each  calendar  month.  Also,  at  the  end  of  each  calendar  month,  the  partners  are 
to  determine  the  net  profit  or  the  net  loss  for  that  month ;  the  net  profit  or  the  net  loss  is 
to  be  divided  equally  between  them  after  allowing  interest  upon  the  investments  of  the 
partners  and  after  crediting  each  partner  with  his  salary  each  month. 

The  profits  are  to  be  divided  equally  although  the  partners'  investments  are  not  equal; 
this  is  due  to  the  fact  that  Miller,  whose  investment  is  smaller,  is  an  automobile  mechanic 
and  salesman  of  considerable  experience. 

The  following  books  of  original  entry  are  to  be  used :  purchases  book,  sales  book,  cash 
book,  and  journal.  Three  ledgers  are  to  be  used;  the  names  of  the  ledgers  and  a  schedule 
of  the  accounts  for  each  ledger  follow: 

SCHEDULE  OF  GENERAL  LEDGER  ACCOUNTS  FOR  SET  V 

Cash  Sales 

Deposit  on  Agency  Contract  Discount  on  Sales 

Notes  Receivable  Purchases 

Accounts  Receivable  Discount  on  Purchases 

Accrued  Interest  Freight-In 

Inventory  Advertising 

Office  Equipment  Labor 

Tool  Equipment  Gasoline 

Garage  Equipment  General  Expense 

Notes  Payable  Building  Expense 

Accounts  Payable  Insurance 

Accrued  Wages  Income  from  Storage  * 

James  Armstrong,  Partner  Interest 

James  Armstrong,  Personal  Interest  on  Investment 

C.  O.  Miller,  Partner  Profit  and  Loss 

C.  O.  Miller,  Personal 


162  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

SCHEDULE  OF  ACCOUNTS  FOR  ACCOUNTS  RECEIVABLE  LEDGER,  SET  V 

William  Headly  Richard  Wright 

Newton  Tracey  Daniel  Glacken 

James  B.  Doyle  Harry  Timmons 

William  Vaughan  James  Bartlett 

Jeffrey  Manufacturing  Co.  W.  D.  Gulp 

Ohio  Tool  Co.  Colimabus  Machine  Co. 

SCHEDULE  OF  ACCOUNTS  FOR  ACCOUNTS  PAYABLE  LEDGER,  SET  V 

Douglas  Motor  Co.  Ohio  Tool  Co. 

Auto  Accessories  Co.  Buckeye  Manufacturing  Co. 

Goodrich  Rubber  Co.  National  Cash  Register  Co. 
Columbus  Machine  Co. 

Each  account  in  the  general  ledger  requires  ]/i  page;  each  account  in  the  accounts 
receivable  ledger  }/^  page;  and  all  the  accounts  in  the  accounts  payable  ledger  should  be 
opened  on  one  page. 

SPECIAL   COLUMNS   IN  SET  V 

The  cash  book  contains  the  following  special  columns  on  the  "Cash  Received"  side: 
Accounts  Receivable  Cr.,  Discount  on  Sales  Dr.,  and  Net  Cash  Dr.  These  columns  are 
used  only  for  recording  the  amount  with  which  a  customer  is  credited;  the  amount  of 
discount  which  is  deducted  from  a  sale;  and  for  recording  the  net  amount  of  cash  received 
from  a  customer.  Thus  these  columns  are  concerned  with  customers'  accounts  only,  and 
any  cash  that  may  be  received  from  other  sources  should  be  entered  in  the  General  column. 
The  cash  book  contains  the  following  special  columns  on  the  "Cash  Paid"  side :  Accounts 
Payable  Dr.,  Discount  on  Purchases  Dr.,  and  Net  Cash  Cr.  These  columns  are  used  for 
recording  the  amount  with  which  creditors  are  charged;  for  recording  the  amount  of  dis- 
count that  is  deducted  from  purchase  invoices;  and  for  recording  the  net  amount  of  cash 
paid  to  creditors.  It  will  be  seen,  therefore,  that  these  columns  are  concerned  only  with 
the  payment  of  creditors'  accounts,  and  any  cash  that  may  be  paid  out  for  any  other  purpose 
should  be  entered  in  the  General  column. 

The  journal  likewise  contains  two  special  columns  as  follows:  Accounts  Receivable  Cr. 
and  Accounts  Payable  Cr.  These  columns  should  receive  only  the  amounts  of  entries  that 
are  posted  to  the  personal  accounts  receivable  and  the  personal  accounts  payable.  All 
other  journal  entries  are  made  in  the  usual  way  and  the  amounts  of  such  entries  are  entered 
in  the  general  columns. 

It  is  usually  a  simple  matter  to  determine  the  proper  column  in  which  the  amount  of 
an  entry  should  be  placed ;  this  may  be  done  by  referring  to  the  schedules  of  ledger  accounts 
for  this  set,  and  by  determining  the  ledger  in  which  the  particular  account  is  contained. 
Thus,  if  the  account  under  consideration  is  contained  in  the  general  ledger,  then  the  amount 
of  the  entry  must  be  placed  in  the  general  ledger  column;  if  the  account  under  considera- 
tion is  contained  in  the  accounts  receivable  ledger,  then  the  amount  of  the  entry  must  be 
placed  in  the  accounts  receivable  column;  etc. 

The  special  columns  used  in  this  set  are  for  the  purpose  of  establishing  controlling 
accounts  with  the  subsidiary  ledgers,  and,  consequently,  these  columns  should  receive  only 
the  amounts  of  those  entries  that  affect  the  accounts  of  the  subsidiary  ledgers. 


SET  V— AUTOMOBILE  AGENCY— ONE  MONTH 
MEMORANDA  OF  TRANSACTIONS  FOR  MARCH 


153 


Mar.    1.  James  Armstrong  delivers  to  the  firm  his  personal  check  for  $7,000.00  which  is 
to  be  credited  as  a  part  of  his  investment. 

Enter  the  amount  of  this  check  in  the  column  headed,  "General".  Business  papers  are  not  to  be  used 
in  this  set. 

Mar.    1.  C.  O.  Miller  deUvers  to  the  firm  his  check  for  $5,000.00  as  his  investment. 

1.  Armstrong,  at  the  time  the  agency  was  obtained,  gave  the  Douglas  Motor  Co. 
a  certified  check  for  $1500.00  as  a  deposit  to  be  held  by  the  company  during  the 
term  of  the  agency.  This  deposit  is  to  be  returned  upon  the  expiration  of  the 
contract  of  agency  or  sooner  at  the  option  of  the  company.  This  deposit  is  also 
to  form  a  part  of  the  investment  by  Armstrong.  Therefore,  make  the  proper 
journal  entry  for  it. 

The  proper  entry  for  this  transaction  may  be  made  by  charging  a  special  account  which  wiU  be  known 
as  Deposit  on  Agency  Contract,  and  by  crediting  James  Armstrong,  Partner.  However,  the  amounts  of 
this  entry  should  be  entered  in  the  general  ledger  columns. 

A  CERTIFIED  CHECK 


Chicago.  ///  ^r^^^^  ^^  197-0  .l^/^fr 


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Mar.    1.  Paid  rent  for  March,  $250.00. 

The  amount  of  this  entry  should  be  placed  in  the  column  headed  "General". 

Mar.    2.  Received  bill  from  Douglas  Motor  Co.,  Detroit,  Mich.,  for  $6750.00;  terms, 
2/10,  n/30;  bill  dated  Feb.  26. 
2.  Paid  bill  of  The  Columbus  Bill  Posting  Co.  for  space  on  bill  boards  for  three 
months,  from  Mar.  1.     Amount  of  bill,  $450.00. 

The  amount  of  this  entry  should  also  be  written  in  the  column  headed  "General". 

Mar.    3.  Paid  for  delivery  of  cars  which  were  billed  on  Feb.  26,  $82.50. 

These  cars  were  delivered  overland  instead  of  being  shipped  by  freight;  charge  Freight-In  account  for 
the  amount  of  the  expense  incurred  in  their  delivery. 


154  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Mar.  3.  Received  bill  from  the  Auto  Accessories  Co.,  Toledo,  Ohio,  for  $382.75 ;  dated  Mar. 
1;  terms  1/10,  ii/30. 

Enter  this  bill  in  the  purchases  book. 

Mar.  3.  Sold  to  William  Headly,  1262  E.  Broad  St.,  for  $1425.00, 1—5  Passenger  Touring 
Car,  #18642,  motor  #42816;  terms  $500.00  cash;  balance  30  days.  Make  the 
proper  entries. 

When  making  a  sales  book  record  for  this  sale,  include  in  the  record  the  number  of  the  car  and  the 
number  of  the  motor.  It  is  frequently  necessary  to  refer  to  these  numbers  since  the  firm  agrees  to  maintain 
a  free  service  for  each  car  for  a  period  of  six  months  from  the  date  of  its  sale,  and  these  numbers  are  used 
as  a  means  of  identifjang  the  cars  that  have  been  sold. 

The  credit  for  cash  received  from  this  transaction  should  be  entered  in  the  cash  book,  and  the  amount 
of  the  credit  should  appear  in  both  the  accounts  receivable  column  and  the  net  cash  column. 

Mar.    3.  Paid  for  a  gasoline  tank  and  an  air  pump,  and  for  installing  them,  $950.70. 

Charge  this  amount  to  Garage  Equipment  account.  Though  this  account  has  an  unfamiliar  name, 
it  will  be  treated  in  the  same  manner  as  other  equipment  accoimtB  which  have  been  studied  previously. 

Mar.  4.  The  building  was  repaired  and  put  in  good  condition  for  occupancy  on  Mar.  1. 
Armstrong  paid  all  bills  for  repairing  and  for  equipment  and  supplies;  he  now 
submits  a  list  of  his  expenditures,  for  which  his  investment  account  is  to  be 
credited.  These  expenditures  should  be  charged  to  the  proper  accounts.  The 
list  follows:  Office  Equipment,  $525.00;  General  Expense  (office  supplies),  $54.75; 
Building  Expense,  $768.60;  General  Expense  (rent  while  repairs  were  being  made), 
$85.00.     Make  the  proper  entry. 

Note. — Entries  may  be  posted  as  the  work  for  the  month  progresses,  or  the  posting  may  be  deferred 
until  all  the  entries  for  the  month  are  made.  However,  no  amounts  should  be  posted  during  the  month 
to  the  two  controlling  accounts,  viz.,  Accounts  Receivable  and  Accounts  Payable,  as  the  posting  to  these 
accounts  will  be  done  after  the  books  of  original  entry  are  closed. 

Mar.  4.  Armstrong  gave  the  firm  a  check  for  a  sum  sufficient  to  bring  his  investment  up 
to  the  required  amount.     Make  the  proper  entry  for  the  check. 

4.  Sold  Newton  Tracey,  1483  W.  Broad  St.,  for  $1425.00,  1—5  Passenger  Touring 
Car,  #18648,  motor  #42783;  terms  $1000.00  cash,  balance,  note  at  30  days,  interest 
at  6%.     Make  proper  entries.  ' 

Before  recording  this  transaction,  study  the  entries  for  the  sale  on  Mar.  3.  The  sale  to  Tracey  differs 
from  the  sale  on  Mar.  3  since  Tracey  is  giving  a  note  for  the  balance  of  his  bill;  therefore,  an  entry  to 
record  this  note  should  be  made  in  the  journal.  The  debit  amount  of  this  journal  entry  should  be  placed 
in  the  column  headed  "General  Ledger  Dr.",  and  the  credit  amount  of  the  entry  should  be  placed  in  the 
column  headed  "Accounts  Receivable  Cr." 

All  similar  transactions  should  be  treated  in  a  similar  manner. 

Mar.  5.  Received  bill  from  The  Goodrich  Rubber  Co.,  Akron,  Ohio,  for  $432.50;  dated 
Mar.  2;  terms  2/10,  n/30. 

5.  Cash  sales  of  accessories,  $62.80. 
5.  Paid  for  tools  $131.85. 


SET  V— AUTOMOBILE  AGENCY— ONE  MONTH  155 

Charge  this  to  Tool  Equipment  account.  This  account  will  be  treated  similarly  to  the  other  equipment 
accounts  that  have  been  studied  thus  far.  This  account  represents  an  investment  in  property  which  is 
used  in  the  business. 

Mar.    6.  Paid  salaries  as  follows:  bookkeeper,  S25.00;  mechanic,  S37.50. 

Charge  the  salary  of  the  bookkeeper  to  General  Expense,  and  the  salary  of  the  mechanic  to  Labor. 
The  Labor  account  will  include  the  wages  of  those  who  are  engaged  in  preparing  the  automobiles  for  delivery 
to  customers.  WTien  automobiles  are  shipped  by  freight  or  express,  as  a  rule,  they  are  not  completely 
assembled.  Therefore,  the  dealers  must  complete  the  assembly  and  prepare  the  cars  for  deUvery.  In 
addition  to  completing  the  assembly,  the  mechanics  are  to  keep  all  mechanical  parts  of  the  car  in  good 
condition.  * 

Mar.    6.  Paid  Douglas  Motor  Co.  for  bill  of  Feb.  26. 

Enter  the  full  amount  of  the  bill  in  the  column  headed  "Accounts  Payable  Dr.";  enter  the  amount 
of  the  discount  in  the  column  headed  "Discounts  on  Purchases  Cr.";  then  enter  the  net  amount  of  the 
bill  in  the  column  headed  "Net  Cash  Cr.".    Treat  all  similar  transactions  in  a  similar  manner. 

Mar.  8.  Sold  James  B.  Doyle,  937  Neal  Ave.,  for  $1425.00  1 — 5  Passenger  Touring  Car, 
#18645,  motor  #41992;  terms,  less  1%  for  cash. 

Enter  this  sale  in  the  same  manner  that  you  entered  the  other  sales  even  though  it  is  sold,  "Terms, 
less  1%  for  cash."    The  firm  wishes  to  open  an  account  for  each  customer  who  purchases  a  car.    Why? 

Enter  the  full  amount  of  the  credit,  $1425.00,  in  the  column  headed  "Accounts  Receivable  Cr."; 
enter  the  amount  of  the  discount,  $14.25,  in  the  column  headed  "Discount  on  Sales  Dr.";  then  enter  the 
net  amount  of  cash  received  in  the  column  headed  "Net  Cash  Dr.". 

Treat  all  sinular  transactions  in  a  similar  manner. 

Mar.    8.  Paid  bill  of  the  Auto  Accessories  Co.    Make  the  proper  entry. 

The  entry  for  this  transaction  is  similar  to  the  entry  on  Mar.  6  for  the  pajrment  to  the  Douglas 
Motor  Co. 

Mar.    8.  Paid  freight  on  the  shipment  of  goods  from  The  Goodrich  Rubber  Co.,  $16.48. 

Make  the  proper  entry. 
9.  Received  bill  from  the  Douglas  Motor  Co.  for  $11,250.00;  terms  2/10,  n/30; 

bill  dated  Mar.  7. 
9.  Paid  the  Sinclair  Refining  Co.  $23.50  for  gasoline  for  use  in  demonstrating  the 

cars.     (Charge  to  Gasoline  account.) 

What  kind  of  an  expense  is  this?     Why? 

Mar.  10.  Sold  William  Vaughan,  864  E.  Gay  St.,  for  $1425.00,  1—5  Passenger  Touring 
Car,  #18674,  motor  #41993;  terms  $500.00  cash;  balance,  note  at  30  days,  interest 
at  6%. 

10.  Bought  a  typewriter  for  $125.00,  cash. 

10.  Paid  for  circular  letters  and  other  advertising  matter  $24.80.  Bought  postage 
stamps,  $20.00. 


156  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Mar.  11.  The  cars  which  were  billed  on  the  7th  have  been  delivered  overland.  The 
expenses  incurred  in  obtaining  these  cars  is  $128.85,  which  has  been  paid  in  cash. 
Make  the  proper  entry. 

11.  Sold  the  Jeffrey  Manufacturmg  Co.,  1184  N.  Grand  Ave.,  for  $1487.50,  1— 
5  Passenger  Touring  Car,  #18667,  fully  equipped,  motor  #41386;  terms  $500.00 
cash;  balance  30  days. 

In  the  automobile  trade,  the  manufacturers  furnish  certain  standard  equipment  with  a  car.  The 
dealers  may  add  certain  equipment  to  the  standard  equipment  and  then  sell  a  car  as  "fully  equipped." 
This  causes  the  variation  in  the  price  of  the  car  which  was  sold  to  the  Jeffrey  Manufacturing  Co. 

Mar.  11.  Received  $10.00  for  rental  of  space  for  storage  for  one  month. 

Credit  Income  from  Storage  account.  The  firm  has  more  space  than  is  needed  for  sales  rooms ;  therefore 
they  have  decided  to  rent  this  space  for  storage  purposes. 

Mar.  12.  Cash  sales  of  accessories,  $26.85. 

12.  Received  bill  from  the  Columbus  Machine  Co.,  124  N.  Front  St.,  for  repairing 
a  defective  car.     Amount  of  bill,  $18.75;  terms,  30  da.  net;  date  of  bill.  Mar.  10. 

Enter  this  bill  in  the  journal  crediting  the  amount  of  it  to  the  Columbus  Machine  Co.;  extend  the 
amount  into  the  column  headed  "Accounts  Payable  Cr."  Debit  the  amount  of  this  bill  to  the  Douglas 
Motor  Co.  The  Douglas  Motor  Co.  has  agreed  to  pay  the  cost  of  repairing  defective  parts.  Therefore 
extend  the  amount,  in  red  ink,  into  the  column  headed  "Accounts  Payable  Cr." 

It  will  be  observed  that,  according  to  the  instructions  for  this  entry,  there  is  a  debit  entry  in  a  column 
which  should  contain  only  credit  entries.  However,  since  the  debit  entry  is  written  in  red  ink,  this  calls 
attention  to  the  fact  that  this  entry  is  different  in  character  from  the  entries  that  are  usually  made  in  this 
column.  Therefore,  when  obtaining  the  total  of  the  accounts  payable  column,  do  not  include  the  amounts 
which  are  entered  in  red  ink. 

The  use  of  red  ink  to  distinguish  debit  entries  in  credit  columns  or  credit  entries  in  debit  columns  is 
generally  employed  by  bookkeepers  and  accountants.  It  is  not  uncommon  to  find  a  transaction  in  business, 
the  entries  for  which  are  not  easily  recorded  in  the  usual,  formal  way  owing  to  the  use  of  special  columns 
and  special  books. 

Moreover,  it  is  sometimes  necessary  to  re-name  special  columns  or  to  rule  (by  hand)  additional  special 
columns  in  cases  in  which  a  change  in  a  business  requires  a  change  in  the  methods  of  recording  transactions 
or  of  obtaining  additional  statistics. 

In  all  such  instances  the  bookkeeper  should  be  equal  to  the  emergency,  and,  by  the  use  of  devices 
similar  to  those  which  are  suggested  here,  he  may  overcome  many  difficulties. 

Mar.  12.  Paid  for  painting  signs  on  building  $65.00. 

12.  Received  from  the  Ohio  Tool  Co.,  834  Harrison  Building,  an  invoice  for  tools; 
date  of  invoice  Mar.  11;  amount,  $62.70;  terms,  2/10,  n/30. 

Enter  this  transaction  in  the  journal  (charging  Tool  Equipment  account)  and  credit  the  Ohio  Tool 
Co.  in  the  column  headed  "Accounts  Payable  Cr." 

Mar.  13.  Paid  salaries  due  today. 

13.  Paid  for  gasoline  $115.00. 

13.  Paid  Goodrich  Rubber  Co.'s  bill  of  Mar.  5th. 

15.  Sold  the  Ohio  Tool  Co.  1—5  Passenger  Touring  Car,  #18685,  motor  #41976,  for 
$1425.00;  terms,  $425.00  cash;  balance  30  days. 


SET  V— AUTOMOBILE  AGENCY— ONE  MONTH  157 

There  is  an  account  with  this  company  in  the  accounts  payable  ledger;  but,  since  it  has  become  a 
customer,  there  should  also  be  an  account  with  it  in  the  accounts  receivable  ledger.  It  is  not  unusual  in 
business  to  carry  two  accounts  with  one  person,  firm,  or  corporation;  one  an  account  payable,  and  the  other 
an  account  receivable. 

Mar.  15.  C.  O.  Miller  drew  $100.00,  cash. 

15.  Paid  for  James  Armstrong  $84.38.     This  was  for  his  life  insurance  premium. 
15.  William  Headly  paid  balance  due  on  his  account,  and  the  firm  allowed  him  a 
discount  of  1%  on  the  selling  price  of  his  car. 

15.  Received  $10.00  for  storage  space  for  one  car. 

16.  Sold  William  Headly,  1  Goodrich  Tire  @  $42.85;  terms,  2/10,  n/30. 

16.  Paid  Douglas  Motor  Co.  $5000.00  to  apply  on  bill  of  Mar.  7. 

The  Douglas  Motor  Co.  has  agreed  to  allow  a  proportionate  amount  of  discount  on  payments  that 
are  made  within  the  period  in  which  discount  is  allowed.  In  calculating  the  discount,  remember  that  the 
amount  of  the  payment  sent  to  the  company  is  98%  of  the  amount  to  which  the  firm  is  entitled  to  credit. 

Mar.  16.  Gave  the  Douglas  Motor  Co.  a  note  at  30  days  for  the  balance  of  the  account. 

The  debit  amount  of  this  entry  should  be  placed  in  the  (journal)  column  headed,  "Accounts  Payable 
Cr-",  and  the  credit  amount,  in  the  column  headed  "General  Ledger  Cr." 

Mar.  17.  Cash  sales  of  accessories,  $103.28. 

17.  Sold  Richard  Wright,  384  SuUivant  Ave.,  for  $1425.00,  1—5  Passenger  Touring 
Car,  #19316,  motor  #45118.  Took,  in  exchange,  1  used  car  at  $425.00;  balance, 
cash. 

Enter  in  the  sales  book  in  the  usual  way;  credit  his  account  in  the  usual  way  with  the  payment  of 
cash.  Then,  make  a  journal  entry  debiting  Purchases  account  and  crediting  Richard  Wright  in  the  accounts 
receivable  column. 

Mar.  17.  Received  invoice  from  the  Auto  Accessories  Co.  for  $192.70;  dated  Mar.  15; 
terms,  1/10,  n/30. 

18.  Received  invoice  for  merchandise  from  the  Buckeye  Manufacturing  Co.,  824 
Parsons  Ave.,  for  $124.80;  dated  Mar.  16;  terms,  2/10,  n/30. 

18.  Gave  James  Armstrong  a  check  for  $50.00. 

18.  Paid  freight  on  shipment  from  Auto  Accessories  Co.,  $12.84. 

19.  Paid  premium  on  fire  insurance  policies  covering  office  equipment,  tools,  and 
accessories,  $142.74.     The  policies  are  dated  Mar.  1. 

19.  Received  $10.00  for  storage  space  for  one  month. 

19.  Paid  $427.50  for  building  shelves,  bins,  etc.,  for  store  room  for  parts  and  suppfies. 

This  and  other  similar  expenditures  should  be  charged  to  the  Garage  Equipment  account. 

Mar.  20.  Paid  invoice  of  the  Ohio  Tool  Co.,  less  discount. 

20.  Paid  Salaries  due  today.  The  pay  roll  for  this  week  should  include,  in  addition 
to  the  usual  charges,  the  wages  of  a  mechanic's  helper,  who  is  to  receive  $30.00 
per  week. 

20.  Cash  sales  of  supplies  and  accessories,  $61.82. 


168  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Mar.  20.  Received  invoice  from  The  National  Cash  Register  Co.,  Dayton,  Ohio,  for 
$425.00  for  cash  register.  This  bill  is  dated  Mar.  18;  terms,  $100.00  cash; 
balance  $25.00  per  month  until  paid. 

Enter  this  invoice  in  the  journal.    Treat  it  as  you  did  the  invoice  of  the  Ohio  Tool  Co.  on  Mar.  11; 
then  make  the  proper  charge  for  the  payment  of  cash. 

Mar.  22.  Sold  Daniel  Glacken,  964  State  St.,  for  $1425.00,  1—5  Passenger  Touring  Car, 
#19320,  motor  #45328;  terms  $1000.00  cash;  balance,  note  at  30  da.  at  6%. 
22.  Sold  Harry  Timmons,  1280  Mt.  Vernon  Ave.,  for  $1425.00,  1—5  Passenger 
Touring  Car,  #19337,  motor  #45437;  terms,  $1200.00  cash;  balance,  30  days. 

22.  Cash  sales  of  accessories  and  supplies,  $84.25. 

23.  Sold  James  Bartlett,  420  E.  Broad  St.,  for  $1425.00,  1—5  Passenger  Touring 
Car,  #19338,  motor  #45442;  terms,  1%  discount  for  cash. 

23.  Received  invoice  from  the  Auto  Accessories  Co.  for  $126.80;  dated  Mar.  20; 
terms,  1/10,  n/30. 

24.  Paid  for  gasoline  $46.00. 
24.  Paid  for  advertising  $42.60. 

24.  Paid  Auto  Accessories  Co.  for  bill  of  Mar.  15. 

25.  Received  check  from  the  Ohio  Tool  Co.  for  balance  of  account,  $985.75. 

The  firm  has  allowed  this  company  1%  discount  on  selling  price  of  car  since  the  account  has  been 
paid  in  full  within  10  days. 

Mar.  25.  Sales  of  accessories  and  supplies,  $38.50. 

25.  Received  bill  from  the  Columbus  Machine  Co.  for  $16.70  for  repairing  a  defective 
car.     Date  of  bill  Mar.  20;  terms,  30  da.  net. 

Charge  this  bill  to  the  Douglas  Motor  Co.    Refer  to  an  entry  on  Mar.  12  for  a  similar  transaction. 

Mar.  26.  Paid  bill  of  the  Buckeye  Manufacturing  Co.,  less  discount. 

26.  Received  bill  from  the  Douglas  Motor  Co.  for  $7875.00;  terms,  2/10,  n/30;  bill 
dated  Mar.  23. 

26.  Cash  sales  of  accessories  and  supplies,  $21.38. 

27.  Paid  salaries  due  today;  the  amount  is  the  same  as  on  the  20th. 

27.  Sold  W.  D.  Culp,  1017  W.  Broad  St.,  for  $525.00,  the  used  car  which  was  received 
on  Mar.  17;  terms,  $200.00  cash;  balance,  $25.00  per  month  until  paid. 

27.  Received  bill  from  the  Columbus  Machine  Co,  for  $68.40  for  repairing  the  used 
car;  dated  Mar.  24;  terms  30  da.  net. 

In  what  book  should  this  bill  be  entered? 

Mar.  29.  Paid  for  delivery  of  the  cars,  which  were  billed  on  Mar.  23,  $93.85. 

29.  Sold  the  Columbus  Machine  Co.,  for  $1425.00,  1—5  Passenger  Touring  Car, 
#19339,  motor  #45448;  terms,  $1000.00  cash;  balance,  30  days. 

Open  an  account  with  the  Columbus  Machine  Co.  in  the  accounts  receivable  ledger. 


SET  V— AUTOMOBILE  AGENCY— ONE  MONTH  159 

Mar.  29.  Received  $10.00  for  storage  space  for  1  month. 

30.  Newton  Tracey  paid  his  note  with  accrued  interest. 
30.  Paid  a  personal  bill  for  James  Armstrong,  $160.75. 

30.  C.  0.  Miller  withdrew  $100.00  cash. 

31.  Cash  sales  of  accessories  and  supplies,  $50.20. 

31.  Paid  Douglas  Motor  Co.,  $5000.00  to  apply  on  note  which  was  given  on  Mar.  16. 
31.  Make  the  proper  entry  to  credit  each  partner  with  his  salary  for  the  month  and 
to  charge  the  salaries  to  General  Expense  account. 

ADJUSTING  ENTRIES  PREPARATORY  TO  CLOSING  THE  LEDGER 

In  some  business  houses,  no  record  is  made  of  accruals,  or  non-ledger  assets  and  liabili- 
ties, except  to  show  them  on  the  Balance  Sheet.  This  plan  is  objectionable,  since  the  ledger 
thus  shows  results  which  are  different  from  the  results  shown  by  the  Balance  Sheet  and  the 
Trading  and  Profit  and  Loss  Statement.  For  obvious  reasons  the  accounts  contained  in 
the  ledger  should  agree  with  the  accounts  used  in  the  preparation  of  the  Balance  Sheet  and 
the  Trading  and  Profit  and  Loss  Statement.  This  agreement  can  be  effected  by  recording 
the  accruals. 

The  entries  which  record  accruals  of  assets,  liabilities,  expenses  and  income  may  be 
made  before  the  books  of  original  entry  are  closed,  or  these  entries  may  be  made  along  with 
the  closing  entries.  Either  plan  will  produce  the  same  results  in  the  accounts,  and 
consequently  will  produce  the  same  results  on  the  Balance  Sheet. 

The  plan  which  is  adopted  in  this  textbook  is  that  of  recording  the  "accruals  before 
closing  the  books  of  original  entry;  thereby,  these  entries  are  removed  from  among  the 
closing  entries,  which  follow  the  preparation  of  the  Trading  and  Profit  and  Loss  Statement 
and  the  Balance  Sheet. 

Accruals,  prepaid  expenses,  and  deferred  credits  to  income  are  sometimes  called  sundry 
resource  and  sundry  liability  inventories,  and  accounts  with  them  may  be  opened  under 
the  following  names :   Sundry  Resource  Inventories  and  Sundry  Liability  Inventories. 

Mar.  31.  Calculate  the  accrued  interest  on  the  two  notes  receivable,  and  after  you  have 
determined  the  amount  of  the  interest,  make  the  following  journal  entry  to 
record  it: 

Accrued  Interest 
Interest 

Mar.  31.  The  agreement  between  the  partners  stipulates  that  each  partner  is  to  be  allowed 
interest  at  6%  per  annum  on  his  investment.  Therefore,  calculate  the  interest 
on  each  partner's  investment  for  the  month  of  March,  and  make  the  proper 
entry  for  the  interest.     This  entry  should  be  as  follows: 

Interest  on  Investment  '- 

James  Armstrong,  Partner 
CO.  Miller,  Partner 

The  interest  thus  allowed  should  not  be  posted  to  the  Interest  account  that  is  already 
in  the  ledger,  since  the  interest  that  is  allowed  to  the  partners  is  used  merely  as  a  device 
for  partly  equalizing  the  difference  between  the  partners'  investments.    Furthermore,  this 


160  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

charge  for  interest  is  not  an  operating  expense,  and  should  not  appear  on  the  Trading  and 
Profit  and  Loss  Statement  as  such  an  expense;  but,  it  should  appear  on  this  statement  as 
the  last  charge,  or  deduction,  from  the  total  net  income. 

Mar.  31.  Determine  the  amount  of  the  wages  due  employees.  They  have  earned  wages 
for  3  days,  and  the  following  journal  entry,  when  completed,  will  record  the 
accrued  wages: 

General  Expense 
Labor 

Accrued  Wages 

MERCHANDISE  INVENTORY,  PREPAID  EXPENSE,  AND  DEFERRED  INCOME 

The  Inventory  of  Merchandise  is  $15,585.15 

Advertising  paid  2  months  in  advance  300.00 

Gasoline  on  hand  61.50 

Insurance  130.84 

The  building  is  leased  for  5  years,  and  the  firm  has  decided  to  charge  off,  each  month, 
1/60  of  the  Building  Expense  account;  therefore,  the  amount  of  the  deferred  charge  is 
$839.37 

The  income  from  storage  is  not  all  earned  during  the  month  of  March  since  each 
person  is  paid  in  advance  for  one  month.  The  portion  which  will  have  to  be  earned  in 
April  is  $23.83-. 

Entries  for  these  inventories  may  also  be  made  before  the  books  of  original  entry  are 
closed.  However,  they  will  be  treated  in  the  same  manner  as  all  the  inventories  in  the 
previous  sets  have  been  treated. 

PROGRAM   FOR  CLOSING 

The  program  for  closing  this  set  differs  somewhat  from  that  for  closing  the  previous 
sets.  This  variation  is  due  to  the  fact  that  special  columns  and  special  ledgers  are  used. 
The  changes  in  the  program  for  closing  will  reveal  to  the  student  the  adaptability  of  special 
columns  and  special  books  in  proving  portions  of  the  work  and  in  locating  certain  errors, 
which  may  occur. 

1.  Obtain  ( in  pencil)  the  total  of  each  column  in  the  books  of  original  entry. 

2.  Close  and  rule  the  books  of  original  entry  which  contain  special  columns. 

In  the  explanatory  column  of  the  journal,  on  the  first  blue  line  which  has  not  been 
used  for  an  entry,  insert  the  following:  "Accounts  Receivable  Cr.",  and  "Accounts  Payable 
Cr."  Opposite  these  terms  and  on  the  same  blue  line  with  them,  insert,  in  black  ink,  in 
their  respective  columns,  the  total  of  the  accounts  receivable  column  and  the  total  of  the 
accounts  payable  column.  Then,  rule  with  single  and  double  red  lines  just  as  you  did  in 
the  sales  books  of  previous  sets. 

Do  not  forget  to  post  the  three  amounts,  which  are  in  the  accounts  payable  column 
of  the  journal  and  which  are  debits,  to  the  Accounts  Payable  account. 

On  the  debit  side  of  the  cash  book,  extend  the  amount  of  the  net  cash  column  (on  the 
same  blue  line)  into  the  general  column,  and  then  add  it  with  the  other  amounts  of  that 
column  to  obtain  the  total  amount  of  cash  received.  On  the  credit  side  of  the  cash  book, 
extend  the  amount  of  the  net  cash  column  (on  the  same  blue  line)  into  the  general  column 


SET  V— AUTOMOBILE  AGENCY— ONE  MONTH 


161 


to  obtain  the  total  amount  of  cash  paid.  The  difference  between  the  totals  of  the  two 
general  columns  will  be  the  balance  of  cash.  The  cash  book  is  then  ruled  with  single  and 
double  red  lines  like  the  previous  cash  books.  Study  the  following  illustration  of  the 
ruling  of  a  special  column  cash  book.  Observe  that  the  pages  in  the  ledger,  to  which  the 
totals  of  the  special  columns  have  been  posted,  are  indicated  just  below  the  ruling  of  the 
special  columns. 


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3.  Close  and  rule  the  purchases  book  and  the  sales  book  as  follows: 

In  the  explanatory  column  of  the  purchases  book,  on  the  first  blue  line  which  has  not 
been  used  for  an  entry,  insert  the  following:  "Purchases  Dr."  and  "Accounts  Payable  Cr." 
On  the  same  blue  line  with  these  names,  write  in  black  ink,  in  the  second  amount  column, 
the  total  purchases  for  the  month.    Then  rule  this  book  in  the  usual  manner. 

The  sales  book  is  closed  in  a  similar  manner;  however,  in  the  explanatory  column 
of  this  book,  insert  the  following:  "Accounts  Receivable  Dr."  and  "Sales  Cr."  Extend  the 
total  sales  into  the  second  amount  column. 

4.  Post  the  totals  of  the  various  special  columns  according  to  the  heading  of  each 
column.  All  these  totals  are  posted  to  accounts  in  the  general  ledger,  except  the  totals  (in 
the  cash  book)  of  the  two  columns  headed  "Net  Cash  Dr."  and  "Net  Cash  Cr."  Remember 
also  that  the  totals  of  the  two  general  ledger  columns  in  the  journal  are  not  posted,  but  that 
the  individual  items  in  these  columns  are  posted. 

5.  Test  the  correctness  of  the  subsidiary  ledgers. 

First,  test  the  accounts  receivable  ledger  to  determine  whether  or  not  it  agrees  with 
the  Accounts  Receivable  account  in  the  general  ledger.  This  test  should  be  made  by  pre- 
paring a  list  of  the  balances  of  the  accounts,  which  are  in  the  accounts  receivable  ledger, 
and  by  totaling  these  balances;  this  total  should  agree  with  the  balance  of  the  Accounts 
Receivable  account  in  the  general  ledger.    This  is  a  proof  of  the  accounts  receivable  ledger. 

Second,  test  the  accounts  payable  ledger  in  a  similar  manner  to  determine  whether 
or  not  it  agrees  with  the  Accounts  Payable  account  in  the  general  ledger. 

The  lists  of  accounts  which  are  prepared  from  the  subsidiary  ledgers  are  commonly 
called  schedules,  and  are  frequently  designated  by  letters,  that  is,  the  list  of  accounts 
receivable  may  be  designated  as  Schedule  A,  and  the  list  of  accounts  payable  as  Schedule  B. 
Any  list  of  accounts  or  items  which  is  prepared  in  detail  and  which  is  used  to  prove  the 
accuracy  of  an  account,  is  commonly  called  a  schedule. 

6.  Prepare  a  trial  balance  from  the  general  ledger. 

7.  Prepare  a  Trading  and  Profit  and  Loss  Statement. 


162  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

In  the  preparation  of  this  statement,  you  should  obtain  the  net  profit  from  sales; 
then,  write  the  heading  "Other  Income",  and  under  this  heading  place  the  accounts  which 
show  the  minor  sources  of  income. 

8.  Prepare  a  Balance  Sheet. 

9.  Prepare  the  necessary  journal  entries  for  closing. 

10.  Rule  the  general  ledger  accounts  which  are  affected  by  the  closing  entries,  and 
bring  down  the  balances  of  those  accounts  which  contain  deferred  charges. 

11.  The  accrued  accounts,  which  were  opened  in  the  general  ledger  and  which  resulted 
from  "taking  up"  the  accrued  interest  and  the  accrued  wages,  may  be  left  as  they  are,  or 
they  may  be  closed.  If  these  accounts  are  left  open  in  the  ledger,  they  should  be  treated 
as  follows:  When  the  interest  on  the  notes  is  paid,  enough  should  be  credited  to  Accrued 
Interest  account  to  close  it;  likewise,  when  the  employees  are  paid,  enough  should  be 
charged  to  Accrued  Wages  account  to  close  it. 

A  very  simple  way,  however,  to  treat  these  accounts  is  to  reverse  the  journal  entries 
by  means  of  which  the  accounts  originated.  Then,  by  posting  these  reversed  entries,  the 
accrued  accounts  are  closed  and  the  amounts  of  the  accruals  are  distributed  back  to  their 
proper  expense  and  income  accounts.  The  accounts  which  are  closed  by  these  entries 
should  then  be  ruled  in  the  usual  manner. 

12.  Prepare  a  test  trial  balance  from  the  general  ledger  to  determine  whether  or  not 
this  ledger  is  in  balance  to  begin  the  following  period. 

EXERCISE  XVII 

If  you  have  sttidied  Set  V, — not  merely  recorded  the  transactions — you  should  understand  the  necessity 
foT  certain  special  columns  in  the  books  of  original  entry.  Moreover,  you  should  be  able  to  suggest  changes 
that  will  simplify  and  improve  the  accounting  system  which  is  used  in  Set  V. 

The  firm  of  Armstrong  &  Miller  has  obtained  the  agency  for  the  state  of  Ohio  for  the  sale  of  the  products 
of  The  Johnson  Truck  Co.,  who  manufacture  motor  trucks  and  accessories.  The  trucks  will  be  sold  through- 
out the  state  to  dealers  as  subagents,  but  Armstrong  &  Miller  will  reserve  all  rights  for  the  city  of  Columbus 
and  Franklin  County. 

The  firm  wishes  to  know  the  net  profit  or  the  net  loss,  resulting  from  the  sales  of  trucks,  as  separate 
from  the  income  from  other  departments  of  the  business.  Consequently,  you  may  devise  such  additional 
accounts,  columns,  or  books  as  you  may  consider  necessary  to  obtain  the  information  desired  by  the  firm. 

Explain  your  suggestions  fully,  and  illustrate  them  by  drawing  or  sketching  the  accounts,  columns, 
or  books  which  you  consider  necessary. 

ACCOUNTS  RECEIVABLE— EXERCISE  XVIII 

Among  the  supplies  in  your  outfit  is  Test  Ledger  III,  which  represents  the  accounts  receivable  ledger 
of  the  National  Manufacturing  Co.  as  at  Mar.  31,  19 — .  This  ledger  is  supposed  to  be  in  balance  with 
the  Accounts  Receivable  account  in  the  general  ledger.    Proceed  with  the  work  as  follows: 

1.  In  order  to  know  that  this  ledger  is  in  accord  with  its  controlling  account,  you  should  prepare  a 
list  of  the  balances  and  total  them;  this  will  also  determine  the  accuracy  of  the  work  that  preceded  yours. 

2.  Post  the  amounts  shown  by  the  following  Recapitulation  of  Sales  for  the  month  of  April.  Open 
the  new  accounts,  as  they  occur,  on  the  fourth  page  of  the  ledger,  as  indicated  by  the  lines  for  headings. 

Note. — If  desirable,  the  student  may  copy  these  entries  on  journal  paper;  however,  the  time  required 
for  copying  these  entries  may  be  saved  by  posting  directly  from  the  textbook  to  the  test  ledger. 

3.  Post  the  amounts  that  affect  the  accounts  receivable  and  that  are  shown  by  the  following  journal 
entries  made  during  April. 

Remember  that  since  you  are  in  charge  of  the  accounts  receivable  ledger,  you  should  post  only  those 
amounts  that  affect  the  individual  accounts  of  the  customers. 


SET  V— AUTOMOBILE  AGENCY— ONE  MONTH 

SUMMARY  OF  SALES  FOR  APRIL  19—. 


163 


Date 

To  Whom  Sold 

Folio 

Sale  No. 

Amount 

Apr. 

1 

Wright  Kay  &  Co. 

173 

134 

60 

1 

Manning,  Merrill  &  Co. 

174 

62 

18 

2 

James  A.  Evans 

175 

82 

94 

3 

Nordyke  &  Marmon  Co. 

176 

236 

84 

4 

John  D.  Dickman 

177 

104 

67 

5 

Holton  &  Barnes 

178 

48 

32 

6 

Novelty  Manufacturing  Co. 

179 

184 

62 

8 

Wright  Kay  &  Co. 

180 

48 

64 

9 

Clayton  &  Lambert,  Memphis,  Tenn. 

181 

136 

82 

10 

National  Brass  Co. 

182 

84 

96 

11 

Merrill  Lynch  &  Co. 

183 

63 

76 

12 

Carson  Pirie  Scott  &  Co.  * 

184 

198 

46 

13 

National  Brass  Co. 

185 

72 

42 

15 

Acme  Forge  &  Foundry  Co. 

186 

84 

62 

16 

Tuttle  &  Clark,  New  Orleans,  La. 

187     * 

62 

39 

17 

Carson  Pirie  Scott  &  Co. 

188 

41 

39 

18 

Thomas  McNulty  &  Co. 

189 

84 

62 

19 

Novelty  Manufacturing  Co. 

190 

104 

39 

20 

National  Electric  Co.,  Lynn,  Maas. 

191 

86 

48 

22 

Holton  &  Barnes 

192 

60 

34 

23 

Wright  Kay  &  Co. 

193 

67 

80 

24 

Dobson  Evans  &  Co. 

194 

136 

47 

25 

Nordyke  &  Marmon  Co. 

195 

138 

78 

25 

Manning  Merrill  &  Co. 

196 

58 

11 

26 

Acme  Forge  &  Foundry  Co. 

197 

59 

82 

28 

John  J.  Dickman 

198 

43 

86 

29 

Thomas  McNulty  &  Co. 

199 

83 

45 

30 

Novelty  Manufacturing  Co. 

200 

79 

38 

JOURNAL 

Gen. 
Ledger  Dr. 

Gen. 
Ledger  Cr. 

Accounts 

Payable 

Dr. 

Accounts 

Receivable 

Cr. 

Apr 

10 

Sales 

Wright  Kay  &  Co. 

8 

64 

8 

64 

20 

Freight-Out 
National  Electric  Co. 

7 

24 

7 

24 

22 

Notes  Receivable 

Acme  Forge  &  Foundry  Co. 

363 

85 

363 

85 

4.  Post  the  amounts  contained  in  the  accounts  receivable  column  to  the  proper  accounts  in  the  sub- 
sidiary ledger,  from  the  following  cash  book:  (Do  not  post  any  other  amounts;  they  would  be  posted  by 
the  head  bookkeeper.) 

The  following  illustration  represents  a  page  from  the  debit  side  of  the  loose-leaf  cash  book  of  the 
National  Manufacturing  Co.  You  will  note  that  the  balance  of  cash  at  the  beginning  of  the  month  is 
omitted.  The  amount  of  the  cash  balance  and  other  important  business  facts  are  known  only  by  those 
who  have  access  to  the  general  ledger,  which,  in  many  business  houses,  is  locked. 


164 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 

CASH  RECEIVED 


Accts. 

Dis.  on 

Net 

Rec.  Cr. 

Sales  Dr. 

Cash 

General 

Apr 

1 

Holton  &  Barnes 

On  Acct. 

95 

77 

1 

92 

93 

85 

2 

Wright  Kay  &  Co. 

u 

36 

80 

74 

36 

06 

3 

Thomas  McNulty  &  Co. 

u 

51 

86 

51 

86 

4 

National  Brass  Co 

u 

15 

39 

15 

39 

5 

Carson  Pirie  Scott  &  Co. 

u 

87 

20 

1 

74 

85 

46 

6 

James  A.  Evans 

u 

136 

18 

136 

18 

8 

Merrill  Lynch  &  Co. 

u 

85 

00 

1 

50 

83 

50 

10 

Novelty  Manufacturing  Co. 

u 

84 

10 

1 

68 

82 

42 

11 

Manning  Merrill  &  Co. 

u 

102 

38 

102 

38 

12 

Notes  Receivable 

JLA 

500 

00 

13 

Nordyke  &  Marmon  Co. 

On  acct. 

546 

37 

10 

93 

535 

44 

14 

Sales 

For  cash 

46 

38 

15 

Rent 

To  May  15 

50 

00 

22 

National  Brass  Co. 

On  acct. 

218 

00 

4 

36 

213 

64 

27 

Wright  Kay  &  Co. 

» 

163 

42 

3 

27 

160 

15 

29 

Manning  Merrill  &  Co. 

u 

46 

83 

46 

83 

30 

Sales 

For  cash 

39 

86 

5.  Prepare  a  list  of  the  personal  accounts  with  their  balances ;  the  total  of  these  balances  should  agree 
with  the  balance  of  the  Accounts  Receivable  account  of  the  general  ledger. 

6.  Submit  your  ledger  and  the  list,  or  schedule,  of  the  personal  accounts  to  your  teacher  for  examinati  o  n 

ACCOUNTS  PAYABLE— EXERCISE  XIX 

Take  Test  Ledger  IV  from  your  outfit;  this  represents  the  accounts  payable  ledger  of  the  National 
Manufacturing  Co.  as  at  Mar.  31,  19 — .  It  is  supposed  to  be  in  accord  on  this  date  with  the  Accounts 
Payable  account  in  the  general  ledger.     Proceed  with  your  work  as  follows: 

1.  Prepare  a  list  of  the  balances  on  this  date,  and  total  them  to  determine  whether  or  not  this  ledger 
agrees  with  its  controlling  account.  It  is  usually  advisable  to  test  the  correctness  of  ledgers  when  con- 
tinuing work  someone  else  has  begun. 

2.  Post  all  entries  that  affect  the  personal  accounts  payable  in  the  subsidiary  ledger  from  the  following 
purchases  book.     Open  the  new  accounts,  as  they  occur,  on  the  second  page  of  the  accounts  payable  ledger. 


PURCHASES 

Apr. 

3 

United  States  Metal  Co. 

1/30,  n/60 

439 

62 

8 

Bauer  &  Black 

2/10,  n/30 

196 

76 

10 

Williams  Brothers  &  Co.,  Buffalo,  N.  Y. 

2/30,  n/60 

352 

60 

18 

Russell  Ware  &  Co. 

2/10,  n/3 ) 

241 

37 

21 

The  General  Aluminimi  Co. 

2/10,  n/30 

116 

37 

23 

National  Woodenware  Co.,  Grand  Rapids,  Mich. 

2/10,  n/30 

102 

30 

24 

Bauer  &  Black 

2/10,  n/30 

84 

37 

26 

American  Steel  Ball  Co.,  Philadelphia,  Pa. 

2/10,  n/30 

127 

94 

27 

Thomas  Page  &  Son,  Boston,  Mass. 

2/10,  n/30 

138 

78 

3.  Post  all  entries  that  are  contained  in  the  special  columns  and  that  affect  the  individual  accounts 
payable  in  the  subsidiary  ledger,  from  the  following  journal; 


SET  V— AUTOMOBILE  AGENCY— ONE  MONTH 

JOURNAL 


165 


Apr 


24 


Russell  Ware  &  Co. 
Purchases 


Gen. 

Gen. 

Accounts 

Accounts 

Ledger  Dr. 

Ledger  Cr. 

Payable 

Receivable 

Dr. 

Cr. 

41 

27 

41 

27 

4.  Post  all  amounts  (contained  in  the  accounts  payable  column)  that  affect  the  individual  accounts 
payable  in  the  subsidiary  ledger,  from  the  following  cash  book. 


CASH  PAID 


Accts. 

Dis.  on" 

Net 

Pay  Dr. 

Purch.Cr. 

Cash 

Expense 

General 

Apr 

1 

2 

Rent 

Notes  Payable 

Apr. 

U.  T.  Co. 

1 

150 

00 

150 
500 

00 
00 

5 

The  General  Aluminum  Co. 

On  acct. 

238 

94 

2 

39 

236 

55 

8 

Edison  Light  &  Power  Co. 

Mar. 

28 

62 

8 

Bell  Telephone  Co. 

Mar. 

8 

00 

10 

Russell  Ware  &  Co. 

On  acct. 

227 

08 

4 

54 

222 

54 

14 

Freight-In 

B&B 

12 

82 

15 

Office  Salaries 

To  4/15 

187 

50 

17 

Leather  Specialties  Co. 

On  acct. 

264 

28 

2 

64 

261 

64 

17 

Bauer  &  Black 

On  acct 

196 

76 

1 

97 

194 

79 

20 

Notes  Payable 

M.  E.  Bk. 

250 

00 

23 

Russell  Ware  &  Co. 

On  acct. 

241 

37 

2 

41 

238 

96 

24 

Freight-Out 

W.K.&  Co. 

6 

84 

26 

Insurance 

Ntl.Agency 

48 

64 

29 

The  Gen.  Aluminum  Co. 

On  acct. 

116 

37 

2 

33 

114 

04 

30 

Office  Salaries 

To  4/30 

■* 

187 

50 

5.  Prepare  a  list  of  personal  accounts  with  their  balances,  from  the  subsidiary  ledger,  and  obtain 
the  total  of  the  accounts  payable.  This  total  should  agree  with  the  balance  of  the  controlUng  account  in 
the  general  ledger. 

6.  Submit  your  work  and  the  list,  or  schedule,  of  accounts  to  the  teacher  for  examination. 


RECAPITULATION  OF  BOOKS  OF  ORIGINAL  ENTRY 

A  recapitulation  of  a  book  of  original  entry  is  simply  a  summary  of  the  various  columns 
and  entries;  it  should  show  the  distribution,  in  totals,  of  charges  and  credits  to  various 
accounts.  Perhaps  the  most  common  use  of  a  recapitulation  is  to  prove  the  mathematical 
accuracy  of  entries  and  columnar  totals. 

Books,  which  contain  special  columns,  should  be  recapitulated  before  posting  as  a 
recapitulation  may  reveal  errors  that  would  not  otherwise  be  discovered  until  a  trial  balance 
is  attempted. 


166 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


EXERCISE  IN  RECAPITULATION  XX 

You  should  now  obtain  the  totals  of  all  columns  in  the  books  that  have  been  used  in  the  two  exercises 
in  accounts  receivable  and  accounts  payable,  which  immediately  precede  this  exercise.  Supply  the  proper 
amounts  from  the  totals  which  you  have  obtained  and  complete  the  following  recapitulations: 


Sales 
Accounts  Receivable  Dr.         $_ 
Sales  Cr,  $_ 

Purchases 
Purchases  Dr.  $_ 

Accounts  Payable  Cr.  $_ 

Cash  Received 
Cash  Dr.  $_ 

Discount  on  Sales  Dr.  $_ 

Accounts  Receivable  Cr.         $_ 
General  Cr.  $_ 


Journal 
General  Ledger  Dr. 
Accounts  Payable  Dr. 
General  Ledger  Cr. 
Accounts  Receivable  Cr. 


Cash  Paid 
Accounts  Payable  Dr.  $_ 

Expense  Dr.  $_ 

General  Dr.  $_ 

Cash  Cr.  $_ 

Discount  on  Purchases  Cr.'  $_ 


The  cash  book  entries,  which  affect  the  accounts  in  the  subsidiary  ledgers,  may  be 
recapitulated  and  their  accuracy  tested  before  posting,  as  follows: 


Accounts  Receivable 

Net  Cash  Dr.  $ 

Discount  on  Sales  Dr.  $ 

Accounts  Receivable  Cr. 


Accounts  Payable 
Accounts  Payable  Dr. 

Net  Cash  Cr.  $ 

Discount  on  Purchases  Cr.    $ 


After. the  books  of  original  entry  have  been  recapitulated  and  the  accuracy  of  the 
entries  determined,  mistakes  may  be  made  in  posting;  but,  such  mistakes  as  may  be  made 
can  then  be  localized.  That  is,  if  there  is  an  error  in  some  account  in  the  general  ledger, 
it  is  necessary  to  check  only  the  postings  to  that  ledger.  The  same  plan  may  be  followed  in 
locating  errors  in  the  subsidiary  ledgers. 


DRAFTS  AND  ACCEPTANCES 

It  is  probable  that  the  draft,  in  some  form,  is  the  oldest  kind  of  commercial  paper 
known.     It  has  been  used  for  various  purposes  for  hundreds  of  years. 

The  most  common  kinds  of  drafts  in  use  today  are  (1)  sight  drafts  and  (2)  time  drafts. 
The  latter  may  be  divided  into  three  principal  kinds  as  follows:  bills  of  exchange,  trade 
acceptances,  and  bank  acceptances. 

SIGHT   DRAFTS 

The  sight  draft  is  similar  in  many  respects  to  a  check.  When  a  customer  is  slow  to 
pay  his  bills,  it  is  the  practice  of  many  business  houses  to  draw  a  sight  draft  on  him  in  order 
to  hasten  payment  of  the  debt. 

After  the  draft  is  made,  it  is  delivered  to  a  bank  by  the  business  house  making  it. 
The  bank  then  presents  the  draft  to  the  debtor  or,  in  case  he  is  located  in  another  city, 
sends  the  draft  to  a  bank  in  his  city,  which  presents  it  to  him  for  payment. 

The  debtor  must  either  pay  the  draft  or  refuse  to  pay  it.  If  he  chooses  the  latter 
course,  he  is  frequently  embarrassed  for  the  lack  of  a  good  excuse  and  is  placed  in  a  very 
unfavorable  position.  Many  business  men  do  not  like  to  have  drafts  made  upon  them, 
but,  in  order  to  maintain  good  credit  relations  with  their  banks,  will  pay  drafts  rather 
than  refuse  payment  of  them. 


DRAFTS  AND  ACCEPTANCES 


167 


Of  course  the  draft  might  be  given  to  a  lawyer  or  to  an  agency  for  collection,  instead 
of  being  given  to  a  bank;  but,  if  the  customer  lived  in  another  city,  the  procedure  for 
collection  would  be  about  the  same  as  if  given  to  a  bank  for  collection. 

If  the  customer  pays  the  draft,  the  money  is  sent  by  the  bank  to  the  drawer  of  the 
draft;  but  if  the  customer  refuses  payment  of  the  draft,  the  transaction  is  at  an  end.  The 
draft  is  then  returned  to  the  drawer  of  it,  and  other  means  for  collecting  the  claim  must  be 
found. 

A  SIGHT  DRAFT 


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The  main  thing  that  concerns  the  student  of  bookkeeping  is  the  entry  to  be  made 
if  the  debt  is  collected.  The  entry  for  the  collection  does  not  differ  from  the  usual  entry 
made  for  the  payment  by  a  customer,  of  an  open  account. 

No  entry  should  be  made  at  the  time  a  sight  draft  is  drawn,  other  than  a  memorandum 
in  pencil,  in  the  ledger,  on  the  account  of  the  customer.  This  memorandum  is  sufficient 
if  it  states  the  fact  that  a  draft  was  drawn,  together  with  the  date  of  the  draft.  This 
memorandum  is  made  in  order  that  the  history  of  the  account  may  be  more  complete, 
and  that  the  record  may  show  what  has  been  done  to  collect  the  account. 

To  determine  the  entries  for  a  sight  draft,  let  us  assume  that  A.  F.  Harvey  paid  the 
illustrative  draft  when  it  was  presented  to  him  by  a  bank  in  La  Grange. 

The  bank  in  La  Grange  would  send  the  payment  on  to  the  Merchants  Exchange  Bank 
in  Chicago.  The  Merchants  Exchange  Bank  would  then  notify  Raynor  that  the  draft 
had  been  paid,  in  which  case  it  would  either  place  the  amount  of  the  collection  to  Raynor's 
credit  or  send  him  a  check  for  it.  The  bank  would  probably  deduct  a  small  amount  as 
compensation  for  its  services  in  making  the  collection.  Therefore  the  question  arises : 
What  kind  of  an  entry  must  Raynor  make  in  his  books?  The  answer  is  that  he  must  make 
exactly  the  same  entry  that  he  would  have  made,  had  the  remittance  been  received  directly 
from  Harvey,  the  debtor.  This  entry,  in  journal  form,  which  assumes  that  there  was 
no  charge  for  collection,  follows: 


Cash 


$114.00 


A.  F.  Haxvey 


$114.00 


168  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

The  entry,  in  journal  form,  if  we  assume  that  the  bank  made  a  charge  of  9  cents 
(Chicago  Clearing  House  rates)  for  collection,  follows: 

Cash  $113.91 

Expense  (Collection  &  Exchange)  .  09 

A.  F.  Harvey  $114.00 

The  form  in  which  either  of  these  entries  may  appear  in  the  cash  book  will  depend, 
of  course,  upon  the  form  of  the  cash  book  itself.  If  this  transaction  is  analyzed,  it  is  easily 
seen  that  it  really  amounts  to  two  transactions:  first,  the  collection  of  the  debt;  second, 
the  payment  of  the  bank  for  its  services  in  making  the  collection. 

EXERCISE  XXI 

In  this  exercise  the  student  is  bookkeeper  for  Hatfield  Brothers.  The  teacher  will  perform  the  duties 
of  a  bank  or  will  appoint  a  student  to  act  in  that  capacity.  Each  student  may  prepare,  on  ledger  paper, 
imaginary  accounts,  or  imaginary  accounts  may  be  placed  on  a  blackboard,  to  show  a  balance  due  from 
each  of  the  persons,  firms,  or  corporations  which  are  mentioned  in  this  exercise.  The  drafts  which  are  to 
be  drawn  in  the  following  exercises  may  be  made  payable  to  a  local  bank. 

Mar.  1.  The  account  of  Robert  Brooks  &  Co.,  Pittsburgh,  Pa.,  is  past  due  for  60  days,  and  during 
that  time  they  have  not  made  any  purchases  nor  have  they  replied  to  the  statements  of  account  mailed  to 
them  each  month. 

Draw  on  them,  at  sight,  for  the  balance  of  their  account,  $248.80,  in  favor  of  a  local  bank.  Prepare 
a  draft,  which  should  correspond  to  the  form  given  in  the  illustration  of  a  sight  draft,  and  hand  it  to  your 
teacher  for  approval  and  for  collection.     What  entry  or  memorandum  should  be  made  for  this  draft? 

Mar.  1.  The  account  of  James  Holden  &  Co.,  Atlanta,  Ga.,  is  past  due,  and  they  have  not  responded 
to  the  statement  of  account  mailed  them  last  month.    The  balance  of  their  account  is  $184.22. 

Draw,  at  sight,  on  them  for  the  balance  of  their  account,  and  deliver  the  draft  to  your  teacher  for 
approval  and  for  collection.     Make  the  proper  entry  or  memorandum. 

Mar.  10.  Received  notice  from  your  bank  that  the  draft  drawn  on  Robert  Brooks  &  Co.,  Pittsburgh, 
Pa.,  had  been  returned  unpaid.     What  entry  or  memorandum  is  necessary? 

Mar.  12.  Received  notice  from  your  bank  that  the  draft  drawn  on  James  Holden  &  Co.,  Atlanta, 
Ga.,  has  been  collected  and  the  proceeds  placed  to  our  credit.  The  proceeds  amounted  to  $183.76,  and  the 
collection  fee,  charged  by  the  bank,  amounted  to  $.46. 

Make  the  proper  entry  or  memorandum  for  the  payment  of  this  draft. 

Mar.  15.  Hatfield  Brothers  have  been  negligent  and  have  allowed  their  account  with  Parker  & 
Thomas,  New  York,  N.  Y.,  to  become  overdue.  Their  bank  has  just  handed  them  a  sight  draft,  which 
was  drawn  by  Parker  &  Thomas,  for  $342.50.  They  (Hatfield  Brothers)  have  decided  to  pay  this  draft 
and  have  issued  a  check  for  the  amount. 

Make  the  necessary  entry  to  record  the  payment  of  this  draft. 

ACCEPTANCES 

Acceptances  may  be  of  three  kinds,  viz.,  time  drafts,  trade  acceptances,  and  bank 
acceptances.  The  first  one  is  a  very  ancient  form  of  commercial  paper;  but  the  other 
two,  since  they  were  authorized  by  the  law  creating  the  Federal  Reserve  Banks,  are  of 
more  recent  origin.    All  these  forms  are  sometimes  referred  to  as  bills  of  exchange,  or  drafts. 

TIME  DRAFTS 

A  draft,  such  as  the  following,  is  usually  drawn  by  one  person,  firm,  or  corporation 
upon  another  person,  firm,  or  corporation.  A  paper  of  this  kind  is  of  no  effect  whatever 
until  it  is  accepted  by  the  drawee;  then  it  becomes  a  promissory  note,  and  it  is  subject  to  the 
same  laws  exactly  as  a  promissory  note. 


DRAFTS  AND  ACCEPTANCES 


169 


This  form  of  draft,  or  bill  of  exchange,  is  not  commonly  used  in  business.  The  entry, 
or  entries,  originating  from  its  use  are  very  similar  to  the  entry,  or  entries  originating 
from  the  use  of  the  ordinary  promissory  note. 


A  TIME  DRAFT 


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In  the  preceding  illustration  of  a  time  draft,  M.  Snowden  is  the  drawer  and  J.  W. 
Hunter  is  the  drawee.  Snowden  would  probably  make  a  notation  on  the  account  of 
Hunter  that  a  draft  had  been  drawn;  or  it  may  be  that  the  entire  transaction  may  have 
been  arranged  previous  to  the  time  the  draft  was  drawn.  When  this  draft  is  presented 
to  Hunter  by  James  Anderson,  Hunter  either  accepts  it  or  refuses  to  accept  it.  If  he  refuses 
to  accept  it,  the  entire  transaction  is  at  an  end;  the  draft  is  returned  to  Snowden,  and  no 
entries  are  required.  But  if  Hunter  accepts  the  draft,  as  shown  by  the  illustration,  the 
question  arises:  What  kind  of  an  entry  must  he  make?  The  answer  to  this  question  is 
very  simple,  if  it  is  remembered,  that  Hunter's  obligation  is  the  same  as  the  obligation 
of  the  maker  of  a  note.    Thus,  his  entry  would  be  as  follows: 


M.  Snowden 

Notes  Payable 


$500.00 


$500.00 


James  Anderson  now  has  in  his  possession  a  note  made  by  J.  W.  Hunter  and  the 
question  arises :  What  kind  of  an  entry  must  Anderson  make  on  his  books?  This  question 
is  also  easily  answered  if  it  is  remembered  that  Anderson  has  received  a  promissory  note 
to  apply  upon  the  account  owed  him  by  M.  Snowden.     Anderson's  entry  would  be: 


Notes  Receivable 
M.  Snowden 


$500.00 


$500.00 


Now  another  question  arises:  What  kind  of  an  entry  should  Snowden  make?  His 
obUgation  on  the  note  is  secondary,  that  is,  if  Hunter  fails  to  pay  the  note,  Snowden  must 
pay  it.    However,  since  his  obligation  is  secondary,  there  is  no  need  to  record  his  liability 


170  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

on  the  note;  but  by  this  transaction  at  least  two  accounts  on  his  books  have  undergone  a 
change  which  should  be  recorded.  These  two  accounts  are  the  personal  accounts  of 
Anderson  and  of  Hunter.  By  this  transaction  Hunter  owes  Snowden  less  and  Snowden 
owes  Anderson  less;  therefore,  in  order  to  record  this  result,  the  following  entry  should 
be  made: 

James  Anderson  $600.00 

J.  W.  Hunter  $500.00 

It  must  be  remembered  that  not  all  of  the  entries  for  this  one  transaction  would 
appear  on  one  set  of  books;  instead,  just  one  of  them  would  appear  upon  each  set  of  books. 

The  first  entry  would  appear  on  Hunter's  books;  the  second  entry  on  Anderson's 
books,  and  the  third  entry  on  Snowden's  books.  This  form  of  draft  is  not  often  used  in 
business,  and,  for  this  reason,  it  is  of  slight  importance. 

EXERCISE  XXII 

In  this  exercise  the  student  is  bookkeeper  for  Hatfield  Brothers.  This  work  may  be  done  in  the  same 
manner  that  the  work  was  done  in  the  last  exercise.  It  will  be  assumed  that  all  arrangements  between  the 
parties  for  the  acceptance  of  the  drafts  have  been  made  before  the  drafts  are  drawn. 

Mar  5.  A  draft  drawn  by  F.  W.  Owens  &  Co.  for  $782.94,  payable  in  30  days,  has  just  been  presented 
to  R.  W.  Hatfield,  and  he  accepted  it  for  Hatfield  Brothers.  This  amount  is  for  the  balance  due  Owens  & 
Co.  on  account. 

Make  the  proper  entry  to  record  the  acceptance  of  this  draft. 

Mar.  10.  A  draft  has  been  returned  to  Hatfield  Brothers  after  it  was  accepted  by  William  Dobbs  & 
Co.,  at  30  days,  for  $487.12.    This  draft  is  for  the  balance  of  Dobbs  &  Go's,  account. 

Make  the  proper  entry  to  record  this  draft. 

Mar.  20.  Davis  &  Thornton  owe  Hatfield  Brothers  on  account  $639.84.  Hatfield  Brothers  owe 
Martin  Chadwick  $321.40.  An  arrangement  has  been  made  whereby  Hatfield  Brothers  are  to  draw  on 
Davis  &  Thornton,  at  30  days,  in  favor  of  Martin  Chadwick  for  the  amount  due  Chadwick. 

Write  the  draft,  using  the  illustration  of  a  time  draft  as  your  model,  and  have  your  draft  approved 
by  your  teacher  who  will  take  it  as  the  agent  of  Martin  Chadwick. 

Prepare  the  proper  entry  for  Hatfield  Brothers  to  record  this  transaction. 


BANK  ACCEPTANCES 

By  the  Act  of  Congress  which  created  the  Federal  Reserve  Banks,  a  bank  may  issue 
an  acceptance  for  the  purchase  of  goods  or  materials  by  a  manufacturer,  importer,  or 
jobber.  A  transaction  of  this  kind  may  originate  as  follows:  A,  a  wholesaler,  may  desire 
to  purchase  a  large  quantity  of  canned  goods  for  which  there  is  a  ready  market;  but  in 
order  to  do  so,  he  finds  it  necessary  to  borrow  money.  He  will  go  to  his  bank  and  arrange 
for  the  bank  to  accept  a  draft  drawn  by  the  seller  of  the  goods  for  the  amount  of  the  sale. 
Then,  when  the  goods  are  delivered,  the  bank  will  place  them  in  storage  and  hold  the 
warehouse  receipts  for  the  goods.  In  the  meantime,  A  has  completed  arrangements 
with  the  bank  for  the  payment  of  the  purchase  price  of  the  goods.  These  arrangements 
may  be  as  follows: 

He  may  pay  the  bank  cash  for  whatever  goods  he  takes  from  the  storehouse  at  the 
time  he  takes  them;  or,  he  may  give  the  bank  a  series  of  notes,  maturing  at  different  dates, 
for  the  amount  of  the  goods  he  has  purchased.  Under  either  plan  the  bank  is  secured  at 
all  times  and  is  reimbursed  for  the  loan  it  has  made. 


DRAFTS  AND  ACCEPTANCES 

A  BANK  ACCEPTANCE 


171 


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/3^  NATIONAL  CITY  BANK  OF  "NEW  YORK 
NEW  YORK  CITY 


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The  only  question  with  which  the  bookkeeper  is  concerned  is  the  form  of  the  entry 
to  record  this  kind  of  a  transaction,  which  does  not  differ  essentially  from  other  transactions 
in  which  a  note  is  issued,  or  a  note  is  received. 

A  may  make  the  following  entry : 

Purchases 

Notes  Payable 

The  seller  of  the  goods  may  make  the  following  entry: 

Notes  Receivable 
Sales 

The  person,  firm,  or  corporation  which  sold  the  goods  would  probably  offer  the  note, 
or  bank  acceptance,  for  sale  or  discount  at  current  rates  of  interest.  If  the  acceptance 
were  sold,  the  one  who  sold  it  may  make  the  following  entry : 

Cash 
Interest 

Notes  Receivable 

TRADE  ACCEPTANCES 

The  trade  acceptance  is  a  draft  which  is  drawn  by  the  seller  of  the  goods  upon  the 
purchaser  and  which  is  accepted  by  the  purchaser.  The  acceptance  must  bear  wpon  its 
face  a  statement  that  the  obligation  of  the  acceptor  arises  out  of  the  purchase  of  goods 
from  the  drawer. 

The  entry  or  entries  necessary  to  record  this  transaction  would  not  differ  from  the 
entries  made  for  the  issuance  or  receipt  of  a  note.  The  explanation  of  the  entry  should 
state  that  the  obligation  arose  from  a  trade  acceptance. 

The  trade  acceptance  is  usually  distinguished  from  the  common  form  of  draft,  or  bill 
of  exchange,  by  its  bearing  the  words  "Trade  Acceptance."  The  transaction  out  of 
which  a  trade  acceptance  arises  is  usually  made  with  the  understanding  that  a  trade 
acceptance  is  to  be  given. 


172 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


The  old  form  of  draft  may  be  drawn  as  the  result  of  any  kind  of  a  transaction,  whether 
it  were  drawn  for  the  purchase  and  sale  of  goods,  wares  and  merchandise,  or  for  a  trans- 
action on  a  stock  exchange  or  for  an  ordinary  loan,  would  make  no  difference. 


A  TRADE  ACCEPTANCE 


NO 


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Thus  it  is  seen  that  the  trade  acceptance  becomes,  simply,  either  a  note  receivable 
or  a  note  payable,  and  that  it  is  so  treated  from  the  bookkeeper's  standpoint. 

PROVISION  FOR  DEPRECIATION  AND  LOSSES 
DEPRECIATION 

Depreciation  is  the  lessening  in  value  of  property  or  rights  of  any  kind  due  to  lapse 
of  time,  usage,  and  other  causes. 

Office  equipment  and  delivery  equipment  depreciate  from  use  and,  in  most  cases, 
could  not  be  sold  for  what  they  cost  after  being  used  for  only  a  few  days  or  weeks. 

A  horse  may  be  used  for  months  or  for  a  year  or  two  and  then  it  may  be  sold  for  more 
than  cost;  but,  if  kept  long  enough,  it  will  gradually  become  useless  and  its  value  will  decrease 
to  nothing.  Many  articles  of  merchandise,  such  as  millinery,  suits,  shoes,  etc.,  depreciate 
in  value  and  sometimes  become  worthless  owing  to  changes  in  styles.  Machinery  depre- 
ciates from  use;  or,  it  may  become  worthless  because  of  the  invention  of  better  machinery. 

Copyrights  and  patent  rights  are  issued  for  a  limited  term  of  years;  and,  therefore, 
these  rights  become  less  valuable  as  the  time  for  their  expiration  approaches. 

Mines  and  quarries  decrease  in  value  as  the  mineral  deposits  are  taken  out  of  them. 
Timber  lands  also  become  less  valuable  as  the  standing  timber  is  cut  and  manufactured 
into  lumber. 

This  gradual  wastage  is  going  on  all  the  time  whether  a  provision  is  made  for  it  or  not; 
and,  sooner  or  later,  the  value  of  the  property  affected  by  it  is  reduced  to  nothing,  or 
almost  nothing.  If  no  provision  has  been  made  for  the  restoration  of  the  capital  represented 
by  these  wasting  assets,  there  may  come  a  time  when  it  will  prove  burdensome  to  the 
business  to  restore  such  property.  For,  to  continue  to  show  profits  and  to  take  such 
profits  out  of  the  business  under  these  conditions,  is  but  to  return  to  the  owners  a  part  of 
the  original  capital  invested  in  the  business. 


DEPRECIATION  173 

After  property  has  become  worthless  for  the  purposes  for  which  it  was  intended,  it 
may  have  a  value  for  some  other  purpose;  thus,  worthless  machinery  has  a  value  as  old 
iron;  books  have  a  value  as  old  paper,  etc.  This  value  is  commonly  known  as  the  junk 
value,  residual  value,  or  salvage  value,  and  it  is  sometimes  taken  into  consideration  when 
estimating  a  rate  of  depreciation. 

TO  DETERMINE  A  RATE  OF  DEPRECIATION 

Every  business  is  confronted  by  the  problem  of  determining  a  rate  of  depreciation, 
as  there  is  no  fixed  rate  that  will  apply  to  any  one  class  of  property  ufider  all  conditions. 
Depreciation  of  property  must  vary  greatly  according  to  the  uses  to  which  the  property 
is  put;  the  climatic  conditions  under  which  it  is  used;  the  qualities  inherent  in  the  property 
itself,  which  may  differ  from  similar  properties;  and  the  habits  of  those  to  whom  the 
property  is  intrusted. 

A  simple  method  for  estimating  a  rate  of  depreciation  follows :  Determine  the  probable 
life,  in  years,  of  the  property;  this  number  of  years  is  considered  as  100  per  cent;  so  the 
rate  of  depreciation  for  one  year  in  per  cent,  would  be  the  quotient,  which  results  from 
the  division  of  100%  by  the  number  of  years  the  property  is  estimated  to  last.  Thus 
if  the  probable  life  of  the  property  is  10  years,  the  annual  rate  of  depreciation  would  be  10%. 

There  are  other  methods  for  estimating  a  rate  of  depreciation  of  property,  but  they 
are  more  or  less  complicated.  The  method  explained  here  is  simple  and  is  quite  generally 
used  by  business  houses,  particularly  those  houses  engaged  in  handling  merchandise. 
Many  large  corporations,  such  as  those  engaged  in  transportation,  in  manufacturing,  or 
in  supplying  public  necessities,  etc.,  employ  appraisers  or  engineers  to  value  their  property 
and  to  determine  a  rate  of  depreciation.  The  bookkeeper,  then,  by  means  of  certain  entries 
gives  effect  to  the  rate  or  rates  of  depreciation  which  were  decided  upon.  While  it  can 
hardly  be  considered  the  work  of  a  bookkeeper  to  decide  upon  rates  of  depreciation,  never- 
theless he  should  be  reasonably  familiar  with  the  principles  by  which  rates  of  depreciation 
are  determined. 

PROBLEMS  IN  DEPRECIATION 

1.  The  Bowen  Products  Co.  has  office  equipment  that  cost  $4,298.64.  They  estimate  the  Ufe  of  this 
property  as  10  years.  What  should  be  the  annual  rate  of  depreciation?  How  much  depreciation  must 
they  provide  for  annually?    How  much  depreciation  each  month? 

2.  A  certain  department  store  has  show  cases,  display  fixtures,  and  other  store  equipment  that  cost 
$10,876.80.  If  the  management  of  the  store  estimates  an  annual  rate  of  depreciation  of  20%,  how  much 
depreciation  should  be  provided  for  annually?    How  much  each  month? 

3.  Crowley  Brothers  own  the  following  property  for  which  they  must  provide  depreciation:  Store 
equipment  $8,418.75,  office  equipment  $3,264.12,  delivery  equipment  $6,382.94.  The  rates  of  depreciation 
follow:  Store  equipment  20%,  office  equipment  10%,  delivery  equipment  15%.  What  is  the  total  annual 
charge  for  depreciation?    The  total  charge  each  month? 

4.  The  Anchor  Manufacturing  Co.  bought  a  light  deUvery  truck  for  $1,640.00.  They  estimated 
depreciation  at  20%  annually.  After  using  the  truck  two  years  they  decided  to  buy  a  heavier  truck,  which 
cost  them  $3,650.00.  They  traded  in  the  old  truck  on  the  new  one  and  were  allowed  $1,000.00  for  it.  Was 
their  allowance  for  depreciation  sufficient? 

DEPRECIATION  ACCOUNT 

This  is  an  account  used  to  show  the  periodic  charge  for  the  wasting  or  decrease  in 
value  of  certain  property. 


174  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

If  a  particular  business  has,  say,  two  different  classes  of  property  which  are  used  in 
the  business,  there  may  be  two  separate  accounts  with  depreciation.  The  title  of  each 
account  recording  depreciation  (if  separate  accounts  are  used)  should  contain  words 
descriptive  of  the  class  of  property  on  which  the  depreciation  was  estimated.  Thus,  by 
this  plan,  the  proper  title  for  an  account  with  the  depreciation  estimated  on  office  equipment 
would  be,  Depreciation  of  Office  Equipment;  likewise,  the  proper  title  for  an  account  with 
the  depreciation  estimated  on  delivery  equipment  would  be,  Depreciation  of  Delivery 
Equipment. 

It  is  easily  understood  that,  if  there  were  many  different  classes  of  property  used  in 
the  business,  the  accounts  necessary  for  depreciation  would  be  equal  in  number  and  would 
add  considerably  to  the  number  of  accounts  carried  in  the  ledger.  It  is  desirable  in  many 
instances,  particularly  in  the  smaller  business  houses,  to  eliminate  as  many  accounts  as 
possible,  provided  the  books  still  show  correct  results.  Therefore,  it  is  not  uncommon 
to  find  depreciation  charged  directly  to  one  or  more  of  the  expense  accounts  which  are 
contained  in  the  two  groups  of  expense  accounts  previously  discussed. 

If  depreciation  is  to  be  charged  directly  to  an  expense  account,  or  to  one  of  the  minor 
classes  of  expense,  the  only  question  to  decide  is:  To  what  expense  account  should  it  be 
charged?  This  is  usually  a  very  simple  matter  to  decide,  if  the  use  to  which  the  property 
is  put  is  kept  in  mind.  Thus,  depreciation  of  office  equipment  may  be  charged  to  an 
account  in  the  general  expense  group,  and  depreciation  of  delivery  equipment  may  be 
charged  to  an  account  in  the  selling  expense  group. 

Depreciation  is  an  expense  regardless  of  the  particular  manner  in  which  it  may  be 
handled;  and,  to  whatever  account  it  may  be  charged,  that  account  should  be  closed  at 
the  end  of  a  fiscal  period  just  like  any  other  expense  account. 

RESERVE  FOR  DEPRECIATION 

Every  charge  for  depreciation  has  its  corresponding  credit.  Thus,  if  a  charge  of  S50.00 
is  made  for  the  depreciation  of  a  particular  asset  or  assets,  some  account  should  be  credited 
with  a  like  amount.  Since  the  charge  is  made  because  of  the  depreciation  of  a  particular 
asset,  it  would  seem  natural  to  credit  the  account,  which  included  that  asset  for  the 
amount  the  asset  has  depreciated.  It  would  not  be  wrong  to  do  this  as  the  balance  (of 
the  account),  which  would  be  obtained  after  allowing  for  depreciation,  would  be  correct. 

But  while  the  account  would  show  the  correct  balance,  the  balance  would  not  be 
the  original  cost  of  the  assets  represented  by  the  account;  and  it  is  sometimes  important 
to  know  that  cost.  / 

Instead  of  crediting  the  particular  asset  account  with  an  amount  which  is  the  estimated 
depreciation,  it  is  a  common  practice  to  credit  this  amount  to  an  account  which  is  commonly 
known  as  Reserve  for  Depreciation. 

PARTICULAR  RESERVES 

If  there  were  only  one  account  for  Reserve  for  Depreciation,  it  would  be  impossible 
to  determine  without  an  analysis  the  amount  contributed  to  this  account  by  each  asset 
or  class  of  assets.  So,  in  order  to  simplify  the  bookkeeping,  it  is  a  good  plan  to  have  as 
many  reserve  accounts  as  there  are  classes  of  property  that  may  depreciate.  In  a  business 
having,  say,  two  classes  of  such  property,  there  should  be  two  accounts  for  Reserve  for 
Depreciation.  Thus,  the  Office  Equipment  account  would  have  its  corresponding  account, 
which  would  be  known  as  Reserve  for  Depreciation  of  Office  Equipment,  and  the  DeHvery 


DEPRECIATION 


175 


Equipment  account  would  have  its  corresponding  account,  which  would  be  known  as 
Reserve  for  Depreciation  of  Delivery  Equipment, 

It  is  possible  that  more  appropriate  titles  might  be  found  for  accounts  of  this  nature, 
but  the  titles  suggested  in  the  preceding  paragraph  are  the  ones  most  commonly  used 
in  business. 

RESERVE  FOR  DEPRECIATION  OF  OFFICE  EQUIPMENT  ACCOUNT 

This  is  an  account  to  which  is  credited  the  estimated  decrease  in  value  of  the  office 
equipment. 

EXERCISE  XXIII 

Trace,  mentally,  the  items  in  the  following  exercise  to  the  illustrative  account  with  Reserve  for 
Depreciation  of  Office  Equipment. 

June  1.  Meyer  &  Donaldson's  books  showed  an  account  with  Reserve  for  Depreciation  of  Office  Equipment 
amounting  to  $504.30,  which  had  accumulated  in  two  years. 
2.  They  bought  a  new  typewriter  for  $150.00  and  traded  in  the  old  typewriter  (which  cost  $100.00) 
at  $30.00.    They  had  used  this  machine  for  2  years  and  allowed  20%  depreciation  annually. 
30.  The  Office  Equipment  account  showed  a  balance  of  $1,336.50,  and  20%  depreciation  annually  was 
allowed  for  the  month  just  ended. 

RESERVE  FOR  DEPRECIATION  OF  OFFICE  EQUIPMENT 


June 


Typewriter 


40 


00 


June 


Balance 
For  June 


504 
22 


QUESTIONS   ON   RESERVE  FOR   DEPRECIATION  OF 
OFFICE  EQUIPMENT  ACCOUNT 

1.  What  should  the  credit  of  this  account  show?  2.  What  should  the  debit  of  this  account  show? 
3.  What  shoiJd  the  balance  of  this  account  show?    4.  What  kind  of  a  balance  should  this  account  show? 

Purpose.  The  purpose  of  this  account  is  to  show  the  provision  made  for  the  decrease 
in  value  of  the  office  equipment. 

Method.  Debit  this  account  with  the  amount  of  the  reserve  that  some  particular 
asset  has  contributed  to  it,  when  that  asset  is  sold,  traded,  or  otherwise  disposed  of. 

Credit  this  account  with  the  estimated,  periodical  allowance  for  the  decrease  in  value 
of  some  asset  which  is  used  in  the  business,  and  which  has  been  previously  charged  to 
the  Office  Equipment  account. 

Result.  The  balance  of  this  account  should  show  the  net  amount  which  has  been  pro- 
vided for  the  decrease  in  value  of  office  equipment. 

METHOD  OF  CREATING  RESERVE  FOR  DEPRECIATION 
OF  OFFICE  EQUIPMENT  ACCOUNT 

Depreciation,  which  is  an  expense,  must  not  be  confused  with  the  reserve  for  depre- 
ciation; they  are  dissimilar  in  every  way.  The  Reserve  for  Depreciation  account  is  used 
as  a  means  of  showing  the  book  value  of  the  asset  account  to  which  the  reserve  is  related. 


176  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

It  is,  therefore,  commonly  called  an  evaluation  account.  At  the  end  of  a  fiscal  period, 
before  the  books  are  closed,  a  journal  entry  may  be  made  to  provide  for  the  reserve.  The 
following  is  an  example  of  how  the  amount  of  the  depreciation  is  estimated  and  of  the 
journal  entry  by  means  of  which  the  estimate  is  recorded  on  the  books: 

June  30.     Meyer  &  Donaldson's  Office  Equipment  account  showed  a  balance  of  $1,336.50. 
A  rate  of  20%  depreciation,  annually,  was  allowed  for  the  month  just  ended. 

Solution 

20%  of  $1336.50  =  $267.30  depreciation  for  one  year. 
$267.30-7- 12  =  $22.28  depreciation  for  one  month. 

Entry 

Depreciation  $22.28 

Reserve  for  Depreciation  of  Office  Equipment  $22.28 

Or,  the  journal  entry  might  be: 

General  Expense  $22.28 

Reserve  for  Depreciation  of  Office  Equipment  $22 .  28 

The  explanations,  which  are  omitted,  would  be  the  same  for  both  these  journal  entries. 


BALANCING  AND  RULING  RESERVE  FOR  DEPRECIATION  OF  OFFICE  EQUIPMENT  ACCOUNT 

There  is  seldom  any  need  to  balance  this  account,  but  if  such  a  need  arises,  it  is  balanced 
and  ruled  Uke  the  Notes  Receivable  account.  It  should  be  closed  only  when  all  the 
property  for  which  it  was  provided  has  been  sold  or  disposed  of  in  some  nanner. 

At  the  end  of  a  fiscal  period,  in  the  preparation  of  the  Balance  Sheet,  it  is  deducted 
from  the  net  amount  of  the  account  for  which  it  was  provided  and  the  difference,  or  present 
value  of  the  property,  is  included  among  the  assets  as  follows: 

•  Office  Equipment  $3852 .  18 

Less;  Reserve  for  Depreciation  770.44 

$3081.74 

The  general  principles  just  explained,  which  pertain  to  the  account  with  Reserve  for 
Depreciation  of  Office  Equipment,  will  apply  as  well  to  all  Reserve  for  Depreciation 
accounts,  no  matter  what  kind  or  class  of  property  is  represented  by  the  asset  account 
to  which  the  reserve  account  relates. 

LOSS  ON  ACCOUNTS   RECEIVABLE 

When  business  is  done  on  credit,  there  must  be  more  or  less  loss  due  to  the  failure  of 
customers  to  pay  their  bills.  It  is  the  common  experience  of  business  men  that  such 
losses  will  occur,  no  matter  what  precautions  may  be  taken  to  prevent  them.  But  these 
losses  may  be  provided  for  in  advance  by  means  of  proper  accounting. 


DEPRECIATION 
BAD  DEBTS  ACCOUNT 


177 


There  are  several  different  methods  in  common  use  to  care  for  personal  accomits 
which  are  known  to  be  worthless.  For  example,  suppose  John  Hollis  owes  Meyer  & 
Donaldson  $350.00,  and  he  is  bankrupt;  Meyer  &  Donaldson  receive  a  check  for  $175.00 
to  apply  on  Hollis'  account,  and  they  are  informed  that  they  will  receive  no  further  pay- 
ment.   They  may  make  the  following  entry: 


Cash 

Profit  &  Loss 
John  Hollis 

Or,  an  entry  may  be  made  as  follows: 

Cash 
Bad  Debts 

John  Hollis 


$175.00 
175.00 


$175.00 
175.00 


$350.00 


$350.00 


If  the  first  entry  is  made,  the  amount  of  the  loss  is  charged  directly  to  the  Profit  &  Loss 
account;  this  entry  also  closes  the  account  with  Hollis.  If  the  second  entry  is  made,  the 
amount  of  the  loss  is  charged  to  the  Bad  Debts  account,  which  may  be  held  as  an  open 
account  until  the  end  of  the  year,  when  the  balance  of  it  may  be  charged  to  the  Profit  &  Loss 
account.  Either  method  will  show  the  losses  caused  by  bad  debts  during  the  year.  If 
there  are  several  such  losses,  the  Bad  Debts  account  may  appear  as  follows: 

BAD  DEBTS 


Mar 

10 

May 

1 

Aug 

15 

John  Hollis 
Davis  Bros. 
F.  Bowen 


J  100 

350 

00 

J  140 

100 

00 

J  168 

75 

00 

Nov 

10 

F.  Bowen 


25 


00 


The  credit  to  this  account  represents  a  payment  during  the  current  period  on  a  personal 
account  that  had  been  previously  charged  to  the  Bad  Debts  account. 

CLOSING  AND  RULING  BAD  DEBTS  ACCOUNT 

It  is  evident  that  this  account  is  used  as  an  intermediate  step  between  closing  the 
personal  account  of  the  debtor  and  finally  charging  it  to  the  Profit  &  Loss  account.  Since 
the  balance  of  the  Bad  Debts  account  is  charged  to  the  Profit  &  Loss  account  at  the  end 
of  a  fiscal  period,  the  Bad  Debts  account  is  closed  and  ruled  like  any  other  account  that  is 
closed  into  the  Profit  &  Loss  account. 

PROVISION  FOR  LOSS  ON  ACCOUNTS  RECEIVABLE 

At  the  end  of  a  fiscal  period  when  profits  and  losses  are  being  determined,  it  is  cus- 
tomary to  make  some  provision  for  losses  which  may  arise  from  nonpayment  of  some  of 
the  accounts  receivable.  Of  course  it  is  not  possible  to  determine  which  particular  account 
may  prove  bad,  but  there  is  a  probability  that  some  loss  will  occur  before  all  the  accounts 
are  collected.    If  it  could  be  foreseen  which  particular  account  would  prove  bad,  this 


178  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

account  could  be  charged  to  the  BadDebts  account  at  the  end  of  a  fiscal  period, and  removed 
from  among  the  accounts  receivable;  but  since  this  is  not  possible,  the  most  logical  thing 
to  do  is  to  provide  in  advance  for  such  losses. 

Since  it  is  not  known  how  much  may  be  lost  from  bad  debts,  it  is  customary  to  estimate 
the  amount.  A  good  guide  for  making  this  estimate  is  the  loss  in  former  years  from  bad 
debts.  This  loss  may  be  determined  as  a  certain  per  cent  of  the  total  sales  for  a  year; 
or  it  may  be  determined  as  a  certain  per  cent  of  the  total  accounts  receivable  at  the  end 
of  a  fiscal  period.  One  method  is  perhaps  as  good  as  the  other,  because  it  must  be  remem- 
bered that  such  a  calculation  is  at  best  nothing  more  than  a  guess.  Yet  it  is  surprising 
how  slight  the  variation  in  the  rate  will  be  if  the  losses  from  this  source  are  averaged, 
for  a  number  of  years,  in  one  business  or  in  one  particular  kind  of  business. 

RESERVE  FOR  LOSS  ON  ACCOUNTS  RECEIVABLE  ACCOUNT 

After  the  probable  amount  of  loss  from  bad  debts  has  been  determined,  the  next 
thing  to  consider  is  the  form  in  which  the  entry  must  be  made  to  give  effect  to  the  estimate. 
Say  that  $300.00  is  the  amount  which  has  been  decided  upon  as  the  probable  loss  from 
bad  debts.    The  entry  to  record  this  estimate  may  be  as  follows  : 

BadDebts  $300.00 

Reserve  for  Loss  on  Accounts  Receivable  $300.00 

Or,  it  may  be : 

Profit  &  Loss  $300.00 

Reserve  for  Loss  on  Accounts  Receivable  $300 .  00 

The  amount  which  was  estimated  as  the  probable  loss,  by  means  of  either  entry,  finds 
its  way  to  the  Profit  &  Loss  account  and  thereby  reduces  the  profits  for  the  period. 

There  is  always  a  possibility  that  the  expected  loss  may  occur.  If  this  happens  in 
the  following  period,  the  proper  adjustment  may  then  be  made.  Suppose  Harris  &  Co., 
who  became  indebted  during  a  previous  period  and  whose  balance  of  $400.00  was  included 
among  the  accounts  receivable  at  the  end  of  the  period,  should  fail  and  pay  only  60% 
of  the  debt.    The  following  entry  may  then  be  made: 

Cash  $240.00 

Reserve  for  Loss  on  Accounts  Receivable     160 .  00 

Harris  &  Co.  $400.00 

It  will  be  seen  that  this  loss  would  not  affect  the  profits  for  the  current  period  and  since 
provision  has  been  made  for  it,  it  apparently  has  no  effect  upon  the  business.  In  other 
words,  the  business  was  prepared  for  a  "shock"  of  this  kind. 

BALANCING  AND  RULING  RESERVE  FOR  LOSS  ON  ACCOUNTS  RECEIVABLE  ACCOUNT 

There  is  seldom  any  need  to  balance  and  rule  this  account.  Like  all  other  accounts 
of  a  similar  nature  it  continues  from  month  to  month  or  year  to  year  as  an  open  account. 
It  may  be  ruled  and  balanced  if  it  is  desired  to  carry  it  forward  to  another  page  in  the 
ledger. 


RESERVES  179 

It  is  also  an  evaluation  account  and,  at  the  end  of  a  fiscal  period  it  may  be  deducted 
on  the  Balance  Sheet  from  its  related  account.  Thus,  when  the  Balance  Sheet  is  prepared, 
these  accounts  would  appear  as  follows: 

Notes  Receivable  $    6000.00 

Accounts  Receivable  $30,000.00 

Less :  Reserve  for  Loss  600 .  00 

29,400.00 

Under  no  circumstances  should  the  accounts  receivable  appear  among  the  assets,  and 
the  reserve  for  accounts  receivable  among  the  liabilities. 

GENERAL  USE  OF  RESERVES 

In  a  mercantile  business,  the  most  common  reserve  accounts  are  those  which  are  related 
to  office  equipment,  delivery  equipment,  store  equipment,  and  accounts  receivable;  though 
in  many  of  the  smaller  establishments  no  account  of  this  nature  will  be  found.  Of  course 
depreciation  of  equipment  and  losses  on  accounts  receivable  do  occur  whether  the  firm 
be  large  or  small,  but  the  smaller  business  houses  have  usually  considered  these  matters 
unimportant.  There  has,  nevertheless,  been  a  tendency  toward  more  careful  bookeeping 
on  the  part  of  such  concerns  since  the  passage  of  the  Income  Tax  Law.  A  moment's 
reflection  will  show  why  this  is  so. 

The  principle  of  providing  a  reserve  to  cover  probable  losses  from  certain  sources  and 
to  cover  the  depreciation  of  certain  kinds  of  property  is  now  very  generally  accepted  in 
business,  since  there  are  certain  lines  of  business  which  are  specially  hazardous,  and  other 
lines  of  business  which  require  a  large  investment  of  capital,  and  in  which  the  return  of  the 
capital  is  more  or  less  doubtful. 

Examples  of  such  lines  of  business  are  the  manufacturing  of  chemicals  and  explosives, 
mining,  lumbering,  engineering  projects,  etc.  Many,  if  not  most,  of  the  hazards  incidental 
to  business  may  be  covered  by  some  kind  of  insurance,  but  there  are  other  businesses  in 
which  the  risks  are  so  great  that  the  rates  of  insurance  are  prohibitive.  Therefore  business 
men  have  attempted  to  protect  their  investments  in  such  cases  by  means  of  a  reserve. 
In  a  book  of  this  nature  it  would  be  impossible  to  attempt  to  discuss  these  various  reserves 
in  special  lines  of  business. 

However,  the  general  principles  which  underlie  the  creation  and  use  of  reserves  as 
here  explained  and  outlined,  would  apply  in  any  line  of  business,  though  the  names  of  the 
particular  accounts  and  the  particular  entries  which  affect  the  accounts  may  vary. 

A  COMMON  ERROR 

It  is  a  common  error  to  confuse  the  ordinary  reserve  for  depreciation  with  a  reserve  fund, 
though  these  terms  are  exactly  opposite  in  meaning. 

Just  as  a  business  man  may  think  that  profits  are  cash  so  he  may  sometimes  think  that 
a  reserve  for  depreciation  or  a  reserve  for  bad  debts  is  the  same  as  a  reserve  fund ;  but  it 
does  not  follow  that  because  a  reserve  has  been  created  that  there  also  has  been  set  aside, 
in  a  special  fund,  an  equivalent  amount  of  cash  that  is  to  be  used  only  for  the  restoration 
of  the  property  on  which  the  depreciation  has  been  estimated.  A  fund  that  is  equal  to 
depreciation  may  be  set  aside,  but  it  seldom  is. 


180  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

The  general  distinctions  between  a  reserve  and  a  reserve  fund  are  as  follows:  A 
reserve  account  is  an  evaluation  account  and  usually  is  deducted,  on  the  Balance  Sheet, 
from  the  amount  of  the  asset  account  for  which  the  reserve  is  created.  Thus,  while  the 
reserve  may  appear  on  the  credit  side  of  a  ledger  along  with  the  habilities,  it  is  not  a  liability 
because  it  does  not  represent  a  debt  that  will  have  to  be  paid.  It  is  merely  a  bookkeeping 
device  which  registers  the  estimated  decrease  in  the  value  of  an  asset  account,  although 
at  the  same  time  an  amount  equal  to  the  estimated  depreciation  is  charged  to  an  expense 
account  and  thus  becomes  a  charge  against  the  profits  of  the  business. 

A  reserve  fund  is  an  amount  of  cash  actually  set  aside  for  a  specific  purpose;  this 
cash  generally  cannot  be  used  for  the  payment  of  ordinary  liabilities;  nor  is  it  available 
for  use  except  for  the  purposes  for  which  it  was  set  aside. 

The  cash  which  has  been  put  in  a  reserve  fund  may  be  invested  in  securities  in  order 
to  obtain  a  higher  rate  of  interest  than  that  paid  on  deposits  by  banks;  therefore,  the 
reserve  fund  may  be  represented  by  investments  rather  than  by  cash.  Consequently  a 
reserve  fund  is  always  an  asset. 

Reserve  funds  are  usually  established  by  appropriating  a  part  of  the  net  profits  or 
income  for  the  purposes  of  the  fund.  Thus  it  is  seen  that  these  appropriations  usually 
follow  the  determination  of  net  profit,  though  in  certain  cases  a  fixed  amount  of  cash 
is  paid  into  a  reserve  fund  throughout  a  fiscal  year.  Mining  companies  may  pay  into 
a  reserve  fund  as  a  provision  against  depletion  of  the  mines,  so  many  cents  per  ton  for 
all  ore  taken  from  a  mine;  lumber  companies  may  pay  into  a  reserve  fund  a  certain  amount 
per  thousand  feet  of  all  standing  timber  that  is  cut;  etc. 

Many  corporations  are  required  by  law  to  maintain  reserve  funds  for  certain  purposes. 
Common  examples  of  such  legal  requirements  are  the  reserve  funds  of  insurance  companies, 
banks,  trust  companies,  etc. 

ABBREVIATIONS  AND  CONTRACTIONS 

Acceptance Accptn.  Deferred Defd. 

Accrued Accd.  Deposit Dep. 

Cash  Book C.  B.  Depreciation Depr. 

Certificate Ctf.  Draft Dft. 

Certified Ctfd.  Payment. Pmt. 

Check Ck.  or  Chk.  Provision Provn. 

Collection Coll.  Recapitulation Recap. 

Controlling   Account Contr.  Acct.  Reserve Res. 

Currency Cy.  Sight  Draft St.  Dft. 


PART  IV. 
THE  STUDY  OF  A  PARTICULAR  BUSINESS 

SET  VI— WHOLESALE  ACCOUNXmO  FOR  GROCERY  BUSmESS— TWO  MONTHS 

Almost  every  city  containing  20,000  inhabitants  or  upwards  has  at  least  one  wholesale 
grocery.  Sometimes  a  smaller  city,  which  has  a  favorable  location,  may  contain  one  or 
more  wholesale  groceries.  The  cause  of  this  is  obvious.  But,  as  may  be  expected,  the 
larger  houses  are  located  in  the  larger  cities,  in  which  the  facilities  for  distribution  are 
better. 

While  the  accounting  system  outlined  in  this  set  is  peculiarly  adaptable  to  a  wholesale 
grocery  business,  similar  systems  of  accounting,  with  minor  modifications,  will  be  found 
in  various  other  kinds  of  wholesale  establishments. 

Most  of  the  transactions  in  this  set  are  so  arranged  that  the  entries  must  be  made 
from  the  documents  themselves.  This  brings  the  student  face  to  face  with  actual  business 
conditions;  because,  in  business  the  entry  or  entries  must  be  determined  very  largely 
from  the  papers  which  the  bookkeeper  sees  and  must  interpret,  or  from  statements  of 
fact  by  someone  who  may  know  of  the  transaction.  Therefore,  the  bookkeeping  work 
for  this  set  cannot  be  done  without  the  use  of  incoming  papers  that  are  incidental  to  the 
business. 

BOOKS  USED 

In  this  set,  the  following  books  of  original  entry  are  used;  purchases  book,  sales  book, 
cash  book,  journal,  sales  rebates  and  allowances  book,  and  purchases  rebates  and  allowances 
book. 

The  following  memorandum  books  are  used:  notes  receivable  book,  notes  payable 
book,  and  petty  cash  book. 

In  the  departmental  accounting  the  following  books  are  used :  department  purchases 
register,  department  sales  register,  department  costs  of  goods  sold  register,  and  depart- 
ment profits  register.  However,  the  use  of  these  departmental  books  is  optional  as  they  are 
used  only  for  determining  the  departmental  costs,  sales,  and  profits. 

Three  ledgers  are  to  be  used;  the  names  of  the  ledgers  and  the  names  of  the  accounts 
for  each  ledger  follow: 

NAMES   OF   GENERAL   LEDGER   ACCOUNTS,  SET   VI 

Cash;  Petty  Cash;  Notes  Receivable;  Accounts  Receivable;  Reserve  for  Loss  on  Accounts  Receivable; 
Mdse.  Inventory;  Accrued  Interest;  J.  C.  Kennedy;  Office  Equipment;  Reserve  for  Depreciation  of  Office 
Equipment;  Notes  Payable;  Accounts  Payable;  Accrued  Wages;  Herbert  Templeton,  Partner;  Herbert 
Templeton,  Personal;  Ray  E.  Parker,  Partner;  Ray  E.  Parker,  Personal;  Sales;  Sales  Rebates  and  Allow- 
ances; Discount  on  Sales;  Purchases;  Freight-In;  Purchases  Rebates  and  Allowances;  Discount  on  Pur- 
chases; Salesmen's  Salaries;  Traveling  Expense;  Box  &  Shipping;  Advertising;  Freight  &  Cartage — Out; 
General  Exi>ense;  Administrative  Expense;  Insurance;  Interest;  Bad  Debts;  and  Profit  &  Loss. 

181 


182  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

NAMES  OF  ACCOUNTS  FOR  ACCOUNTS  RECEIVABLE  LEDGER,  SET  VI 

J.  W.  Bredin  &  Co.,  No.  1;  J.  H.  Walters  &  Bro.,  No.  2;  C.  E.  Brooks  &  Bro.,  No.  3;  Benjamin  Tarner, 
No.  4;  G.  A.  &  C.  L.  Adkins,  No.  5;  A.  M.  Royce  Grocery  Co.,  No.  6;  L.  S.  Terrell  &  Co.,  No.  7;  L.  E. 
Megan  Grocery  Co.,  No.  8;  L.  M.  Wetzel,  No.  9;  J.  W.  Chaffee  &  Co.,  No.  10;  W.  H.  CaUow  Grocery  Co., 
No.  11;  Shaw  Grocery  Co.,  No.  12;  Hamlin  &  Walker,  No.  13;  Tri  City  Grocery  Co.  (C.  O.  D.),  No.  14; 
Armstrong  Grocery  Co.,  No.  15;  and  Walker  &  Holmes  (C.  O.  D.),  No.  16. 

NAMES  OF  ACCOUNTS  FOR  ACCOUNTS  PAYABLE  LEDGER,  SET  VI 

American  Cereal  Co.;  American  Sugar  Refining  Co.;  American  Tobacco  Co.;  A.  H.  Andrews  &  Co.; 
The  J.  K.  Armsby  Co.;  Biloxi  Canning  Co.;  The  Diamond  Match  Co.;  The  N.  K.  Fairbank  Co.;  Inter- 
national Salt  Co.;  Francis  H.  Leggett  &  Co.;  Pillsbury  Washburn  Co.,  Ltd.;  Rathbon  Ridgway  Co.;  Rem- 
ington Typewriter  Co.;  Rubel  Manufacturing  Co.;  Sheboygan  Cheese  Co.;  John  C.  Siegfried  Co.;  Waukesha 
Canning  Co.;  and  Westfeldt  Bros. 

In  the  general  ledger  allow  }/i  page  for  each  account;  also  allow  }^  page  for  each 
account  in  the  accounts  receivable  ledger;  and  in  the  accounts  payable  ledger  allow  3^  page 
for  each  account. 

THE  LOOSE-LEAF  ORDER  SYSTEM 

The  loose-leaf  order  system,  used  in  this  set,  is  the  most  popular  of  all  the  more  recent 
labor  saving  devices  for  accounting  purposes.  The  system  is  in  general  use  in  the  wholesale 
trade  in  paper,  lumber,  iron,  groceries,  drugs,  dry  goods,  etc.;  it  is  also  in  use  in  some 
manufacturing  concerns.  In  a  wholesale  business  there  are  many  more  sales  than  pur- 
chases; therefore  any  saving  of  time  or  effort  in  handling  the  sales  becomes  in  the  aggregate 
a  very  important  matter. 

Orders  are  received  in  the  three  following  ways :  First,  they  may  be  sent  in  by  traveling 
salesmen.  Order  blanks  are  in  pad  form,  and  are  supplied  by  the  firm  and  carried  by  the 
salesman.  These  orders,  when  received  by  the  firm,  are  properly  filled  out,  and  the  prices 
are  already  affixed. 

Second,  orders  may  be  received  from  city  and  suburban  customers  who  either  call 
or  order  by  telephone.  These  orders  are  then  entered  on  regular  blanks  by  some  clerk 
in  the  office,  and  prices  are  affixed  as  they  are  agreed  upon. 

Third,  orders  may  come  by  mail  from  out-of-town  customers.  These  orders  are  copied 
from  the  customers'  letters  on  the  regular  order  blanks,  and  standard,  though  varying, 
prices  are  affixed  by  someone  designated  for  that  duty. 

In  this  set  the  student  is  to  affix  these  prices,  and  for  this  purpose  a  series  of  ten  price 
lists  has  been  provided.  One  of  these  lists  is  to  be  assigned  to  each  pupil  by  the  teacher, 
and  this  list  he  must  always  use  in  affixing  prices  to  mail  orders;  this  will  cause  each  pupil's 
results  to  differ  from  those  using  other  lists. 

HOW  AN  ORDER  IS  HANDLED 

The  success  or  failure  of  a  business  depends,  to  a  large  extent,  upon  the  care  bestowed 
upon  each  order  received  from  a  customer.  The  managers  of  every  business  enterprise 
should  establish  a  particular  system  for  the  proper  handling  of  all  orders;  then  they  should 
follow  carefully  the  details  of  the  system.  This  is  especially  necessary  in  a  large  organiza- 
tion, and  the  smaller  business  houses  will  profit,  as  well,  by  such  a  procedure. 

The  general  plan  of  handling  customers'  orders,  as  outlined  here,  is  followed  by  many 
wholesale  houses  and  by  some  manufacturing  concerns. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    183 


ORDER  REGISTER 


When  an  order  is  received,  it  is  first 
handed  to  the  credit  manager,  who  either 
O.  K.'s  or  rejects  the  request  for  credit.  If 
the  credit  is  allowed,  the  order  is  given  a 
number  called  "Register  Number",  and  it 
is  inmiediately  recorded  in  a  Register.  The 
first  order  would  be  numbered  as  "1",  the 
second  as  "2",  etc.,  consecutively.  When 
the  order  is  registered,  it  is  placed  in  a  clip 
file  and  sent  to  the  stock  room.  The  stock 
clerk  selects  the  stock  called  for  by  the  order, 
and,  as  he  does  so,  checks  (V)  each  item  in 
the  column,  which  is  headed  "Shipper's 
Check,"  The  order  blank  and  stock  are 
then  turned  over  to  the  shipping  clerk,  who 
packs,  kiarks,  and  ships  the  goods.  As  he 
does  so,  he  crosses  the  check  of  the  stock 
clerk,  and  writes  his  initials  in  the  space 
which  is  headed  "Order  filled  by."  Thus, 
there  are  two  persons  to  certify  to  the  cor- 
rect filling  of  the  order.  If,  in  any  case, 
there  are  weights  to  be  determined,  this  is 
done  by  the  shipping  clerk,  who  inserts  the 
amount  of  the  weights  in  the  column  headed 
"Weight."  When  the  goods  have  been 
shipped,  the  shipping  clerk  returns  the  order 
blank  to  the  registry  clerk,  who  marks  in  the 
Register,  opposite  the  record  of  the  order, 
the  date  the  goods  were  shipped.  He  then 
gives  the  blank  a  new  consecutive  number 
called  "Order  Number,"  or  "Holder  Num- 
ber." Some  houses  record  even  the  hour  and  minute  when  the  goods  were  shipped. 
Should  the  record  of  an  order  in  the  Register  fail  to  show  the  date  of  shipping  and  the 
"Order  Number,"  these  omissions  would  cause  inquiry  to  be  made  as  to  what  had  become 
of  the  order.  The  order  blank  is  next  passed  to  the  bill  clerk,  who  makes  the  extensions 
and  footings  on  the  order  blank  and  prepares  the  bill  or  bills  for  the  customer.  The  order 
is  then  handed  to  the  profit  clerk  and,  finally,  it  is  passed  to  the  bookkeeper,  who  posts 
the  amount  or  amounts  of  the  order  directly  to  the  customer's  account  in  the  sales  ledger. 
The  order  blank,  which  now  contains  a  complete  history  of  the  transaction,  is  filed  in  the 
sales  binder. 

ORDER  REGISTER 

The  order  register  is  a  long,  narrow  book  with  the  lines  of  its  left  hand  pages  num- 
bered from  00  to  49  and  of  its  right  hand  pages  numbered  from  50  to  99.  The  columns  of 
this  book  are  headed  as  follows:  "Names",  "Holder  (Order)  Numbers",  "Dates  Billed", 
and  "Amounts".  Higher  consecutive  numbers  on  succeeding  pages  are  made  by  inserting 
the  necessary  digit  or  digits  on  the  top  line  of  each  page. 


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184  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

The  purpose  of  the  order  register  is  to  afford  an  index,  numerically,  of  all  orders; 
therefore  any  order  can  be  found  almost  instantly  when  wanted,  and  this  book  also  enables 
the  management  to  keep  a  close  watch  on  the  shipping  room.  However,  this  book  is  not 
used  in  this  set;  and,  consequently,  no  register  numbers  appear  on  the  order  blanks. 

THE  SALES  BINDER  (SALES  BOOK) 

After  the  orders  are  billed  and  posted,  the  order  blanks  are  placed  in  a  sales  binder 
according  to  order  number  (order  No.  1  at  the  bottom;  then,  order  No.  2;  etc.,  consecu- 
tively) ;  thus  each  constitutes  a  page  of  the  sales  book.  The  order  blanks,  however,  make 
no  provision  for  carrying  the  total  sales  forward  from  page  to  page;  but,  for  this  purpose 
sales  recapitulation  sheets  are  provided. 

SALES  RECAPITULATION  SHEETS 

Sales  recapitulation  sheets  are  of  the  same  size  as  the  order  blanks  and  are  ruled  for 
the  insertion  of  the  date,  the  number,  and  the  amount  or  amounts  of  each  order.  When 
one  column  of  a  sheet  is  filled,  it  is  footed  and  the  total  is  carried  forward  to  the  top  line  of 
the  next  column,  and  so  on.  When  the  first  sheet  is  filled,  its  total  is  carried  to  the  top  line 
of  the  first  column  of  a  second  sheet,  etc. 

At  the  end  of  a  month,  or  other  period,  when  it  is  desired  to  post  for  the  purpose  of 
taking  a  trial  balance,  the  total  of  the  sheets  is  posted  to  the  credit  of  Sales  account  and 
also  to  the  (jebit  of  Accounts  Receivable  account,  thus  maintaining  the  balance  of  the 
general  ledger.  In  large  houses,  recapitulation  sheets  are  kept  in  separate  binders;  but  in 
this  set  they  are  kept  in  the  sales  binder,  following  the  last  order  that  is  listed  for  the 
month  for  which  the  recapitulation  is  made. 

EXCHANGE 

Remittances,  in  settlement  of  accounts,  should  be  made  in  funds  "current"  in  the 
locality  in  which  the  creditor  is  established.  Express  money  orders  are  current  every- 
where, while  certain  bank  drafts  are  current  in  some  cities,  but,  in  other  cities  they  are  not 
current.  Postal  money  orders  are  drawn  by  one  postmaster  upon  another  and  are  limited 
to  one  endorsement.  The  term  "current"  does  not  properly  apply  to  these  papers,  unless 
they  are  drawn  upon  the  postmaster  residing  in  the  same  locality  as  the  creditor.  Almost 
without  exception  personal  checks  are  current  only  in  the  town  or  city  in  which  they  are 
drawn;  therefore  they  are  subject  to  a  collection  fee,  if  they  are  deposited  in  a  bank  in 
another  city. 

The  charges  which  are  made  by  the  associated  banks  of  Chicago  for  collecting  out-of- 
town  checks  are  called  "exchange."  These  charges  range  from  50c  to  $2.00  per  $1000.00, 
with  a  minimum  charge  of  5c  for  each  item  of  $10.00  or  under,  and  a  minimum  charge 
of  10c  for  each  item  above  $10.00. 

In  this  set,  therefore,  personal  checks  which  are  received  from  out-of-town  customers 
include  such  charges  for  exchange  as  the  firm  is  obliged  to  pay  the  bank.  These  charges  for 
exchange  are  deducted  (on  the  deposit  ticket)  from  the  amount  of  the  checks  which  are 
listed  on  it. 

Banks  in  Chicago  do  not  charge  their  depositors  for  exchange  on  drafts  on  New  York, 
because  New  York  is  one  city  on  which  charges  for  exchange  are  "discretionary."  There- 
fore, New  York  drafts,  in  this  set,  do  not  include  exchange.    Neither  is  exchange  collected 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    185 

on  checks  which  are  drawn  on  banks  in  the  county  in  which  Chicago  is  located  (Cook 
County).    In  this  set,  the  only  out-of-town  check  of  this  kind,  is  check  No.  16  (La  Grange). 

While  New  York  checks  and  drafts  are  current  in  Chicago,  Chicago  paper  is  subject 
to  an  exchange  charge  of  1/10  of  1%  in  New  York.  Therefore,  when  checks  are  forwarded 
to  firms  located  in  New  York  City,  the  exchange  must  be  included  in  the  remittance. 
Jersey  City,  N.  J.,  also  requires  its  bills  to  be  paid  in  "New  York  funds,"  but  in  all  other 
cities  Chicago  paper  is  at  par  and  no  exchange  is  included  in  checks  sent  to  such  cities 
in  settlement  of  accounts. 

The  rates  of  exchange  given  above  may  be  changed  from  time  to  time  by  the  Chicago 
or  New  York  banks,  or,  it  may  be  that  banks  in  cities  in  which  Chicago  paper  is  current 
at  the  time  this  is  written,  may  adopt  a  schedule  of  charges  and  may  make  New  York  or 
Chicago  paper  subject  to  an  exchange  charge.  Such  changes,  if  they  occur,  are  not  to 
be  considered  in  working  this  set. 

POSTING  TO  THE  ACCOUNTS  RECEIVABLE  LEDGER 

In  posting,  the  charges  are  entered  in  the  debit  column;  payments,  discounts,  or 
other  credits  are  entered  in  the  credit  column.  The  first  debit  entry  is  extended  into  the 
balance  column  and  subsequent  debits  are  added  to  this  amount.  The  credits,  then,  are 
subtracted  from  the  amount  in  the  balance  column.    Therefore  the  balance  column,  at  all 


ACCOUNT  NO 


ACCOUMT  No  ; 


times,  shows  the  exact  amount  of  the  indebtedness.  When  an  account  is  closed,  dashed 
( — I — )  are  drawn  through  the  balance  column,  or  ciphers  (OOlOO)  are  inserted  in  it. 
(Study  the  illustration  of  accounts  No.  1  and  No.  2.) 


POSTING  FROM  THE  ORDER  BLANKS  TO  THE  ACCOUNTS  RECEIVABLE  LEDGER 

The  amount  of  each  30-day,  60-day  and  4-mo.  bill  is  posted  separately  to  the  cus- 
tomer's account  in  the  accounts  receivable  ledger;  and  instead  of  using  the  expression 
"Mdse"  as  an  explanation  in  the  items  column,  the  terms  of  the  bill  or  bills  are  recorded 
in  this  column  as  follows:    "30-1/10",  "60-2/10",  "4-mo.-4/10". 


186  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

The  terms  of  the  bill  are  used  in  order  that  the  account  may  show  the  different  dis- 
count limits,  and  that  the  bookkeeper  may  determine  from  the  account  the  dates  on 
which  the  different  bills  mature.  If  this  information  cannot  be  obtained  from  the  account 
itself,  it  is  necessary  to  refer  to  the  order  blank  for  it, — this  would  require  too  much  time. 
The  number  of  the  order  is  written  in  the  folio  column  of  the  account,  and  the  number  of 
the  personal  account  is  written  in  the  space  headed  "Ledger  Folio",  which  is  on  the  right- 
hand  side  of  the  order  blank. 

POSTING  FROM   THE   CASH   BOOK  TO  THE  ACCOUNTS  RECEIVABLE  LEDGER 

The  amount  of  each  cash  payment  and  the  amount  of  each  discount  on  a  sale  are 
also  posted  separately  to  the  proper  personal  account;  the  latter  amount  should  be  posted 
after  the  former  amount  has  been  posted.  This  is  done  so  that  the  account  will  show, 
fully,  in  what  manner  the  account  was  settled. 

Sometimes  a  remittance  is  made  "in  full";  or,  sometimes  it  is  made  "on  account", 
covering  specific  bills  of  different  dates.  In  either  case,  it  is  practicable  also  to  post  these 
amounts  so  that  the  account  will  show  the  particular  bills  paid.  This  will  necessitate,  of 
course,  separate  cash  book  entries  for  the  amount  of  each  bill  that  was  covered  by  the 
remittance;  but  if  this  plan  is  followed,  the  bookkeeper  will  be  able  to  determine  not  only 
the  bills  that  are  paid  but  also  the  bills  that  remain  unpaid.  Bills  that  are  paid  are 
"checked  out"  of  an  account;  that  is,  they  are  marked  in  some  way  to  indicate  that  they 
are  paid.  The  check  mark  column  and  the  ordinary  check  mark(  V )  are  often  used  for 
"checking  out"  purposes.  Such  a  method  is  permissible,  but  this  column  is  generally  in- 
tended for  check  marks  when  proving  a  trial  balance,  so  that  confusion  may  result  from  its 
use  for  other  purposes.  It  is  a  good  plan  to  "check  out"  paid  bills  by  placing  a  certain, 
specially  adopted  mark,  in  red  ink,  upon,  or  immediately  after,  the  vertical  line  separating 
the  folio  and  the  debit  columns.    (Study  the  illustration  of  accounts  No.  1  and  No.  2.) 

POSTING  FROM  THE  SALES  REBATES  AND  ALLOWANCES  BOOK 

The  amounts  for  which  the  customers'  accounts  should  be  credited,  are  posted  sepa- 
rately from  this  book  to  the  credit  side  of  the  particular  account  of  the  customer  who  re- 
turned the  goods  or  to  whom  the  credit  is  granted.  The  nature  of  the  credit  should  be 
indicated  in  the  items  column  of  the  ledger  by  the  use  of  such  words  as  "returned", 
"rebate",  "allowance,"  etc. 

The  total  of  the  entries  in  this  book  is  posted  to  the  credit  side  of  the  Accounts 
Receivable  account,  and  to  the  debit  side  of  the  Sales  Rebates  and  Allowances  account. 

POSTING  FROM  THE  PURCHASES   RETURNS  AND  ALLOWANCES  BOOK 

The  amounts  for  which  the  creditors  should  be  charged  are  posted  separately  from 
this  book  to  the  debit  side  of  the  account  of  the  creditor,  to  whom  the  goods  are  returned 
or  by  whom  the  allowances  are  granted.  The  nature  of  the  charge  should  be  indicated  in 
the  explanation  column  of  the  ledger  by  the  use  of  such  words  as  "returned",  "allowance", 
"damaged",  etc. 

The  total  of  the  entries  in  this  book  is  posted  to  the  credit  side  of  the  Purchases 
Returns  and  Allowances  account,  and  to  the  debit  side  of  the  Accounts  Payable  account. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS     187 
INSTRUCTIONS  FOR  BILLING 

In  this  set,  the  student  assumes  the  duties  of  a  bill  clerk  as  well  as  those  of  a  bookkeeper 
and  a  cashier. 

The  first  step  in  doing  the  work  of  the  bill  clerk  is  to  make  the  extensions  on  the 
order  blank,  after  it  is  returned  by  the  shipping  clerk.  The  extensions  are  made  in  ac- 
cordance with  the  following  terms : 

In  the  column  headed  "30  days"  are  placed  the  amounts  of  such  items  as  are  sold 
on  the  following  terms:    30  days  net,  1%,  10  days.    These  items  are  flour,  sugar,  salt, 
matches,  dried  fruits,  cheese,  cereals,  sardines,  and  olive  oil. 

In  the  column  headed  "60  days"  are  placed  the  amounts  of  such  items  as  are  sold 
on  the  following  terms :  60  days  net,  2%  10  days.  These  items  are  coffees,  soaps,  canned 
goods,  tobaccos  and  cigars. 

The  only  item  sold  on  the  following  terms,  4  months,  4%  10  days,  is  tea.  A  sale  of  this 
commodity  occurs  infrequently;  and  when  it  does,  the  amount  of  the  sale  is  extended  in 
the  margin  which  is  on  the  right  of  the  column  headed  "60  days." 

Each  column  is  then  totaled  and  the  order  is  billed. 

Billing  really  consists  of  making  a  copy  of  the  completed  order  blank.  That  is,  one 
bill  is  made  for  all  30-day  items  in  an  order;  the  total  of  this  bill  should  agree  with  the 
total  of  the  corresponding  column  of  the  order  blank.  A  second  bill  is  made  for  all  60-day 
items,  and  a  third  bill  is  made  for  tea,  if  the  order  contains  such  an  item;  each  of  the 
latter  should  agree  with  its  corresponding  column  on  the  order  blank. 

The  terms  should  be  written  on  each  bill  in  the  proper  space,  and  the  date  of  each  bill 
should  be  placed  on  the  order  blank  in  the  space  provided  for  the  date. 

SPECIAL  COLUMNS 

The  special  columns  that  are  used  in  this  set  are  similar  to  the  special  columns  that  were 
used  in  Set  V.  The  following  columns,  however,  were  not  used  in  the  cash  book  in  Set  V, 
but  they  will  be  introduced  in  this  set.  The  column  headed  "Balance"  on  the  debit 
side  of  the  cash  book  should  contain  (for  January)  only  the  total  cash  received  which 
is  obtained  by  adding  the  totals  of  the  net  cash  column  and  the  general  column.  No 
entries  should  be  made  in  the  balance  column  during  the  month. 

On  the  credit  side  of  the  cash  book  there  is  a  special  column — General  Expense — in 
which  should  be  entered  all  items  that  are  to  be  charged  to  the  General  Expense  account. 
At  the  end  of  the  month  the  total  of  this  column  and  the  total  of  the  net  cash  column  are 
added,  and  the  amount  thus  obtained  is  extended  into  the  general  column;  the  general 
column  is  then  totaled,  and  the  sum  of  this  column  is  the  total  amount  of  cash  paid  out. 
The  total  amount  of  cash  paid  out  is  then  deducted  from  the  total  amount  of  cash  received 
and  the  difference  is  the  balance. 

When  the  amount  of  the  cash  balance  on  January  31  is  carried  forward  to  begin  the 
cash  book  entries  for  February,  this  amount  should  appear  as  the  first  and  only  item 
in  the  balance  column  for  February,  until  the  total  of  the  net  cash  column  and  the  general 
column  is  extended  into  the  balance  column  on  February  28.  The  cash  book  for  February 
is  then  balanced  like  it  was  on  January  31. 

The  special  columns  in  the  journal  are  the  same  as  they  were  in  Set  V  and  are  used 
for  the  same  purposes. 


188 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


VARIABLE  SELLING   PRICES 
To  be  used  only  in  connection  with  orders  13,  21,  24,  25,  30,  31,  35,  43  and  47. 


Apples,  Fancy  Evap lb. 

Beans,  2  lb.  P.  L.  String .doz. 

Cigars,  Cremo M 

Francis  Wilson M 

Cheese,  Swiss lb. 

Young  American lb. 

Coffee,  Select  Golden  Rio lb. 

BestO.  G.Java lb. 

Fancy  Santos lb. 

Corn,  Old  Abe doz. 

Flour,  Ceresota  J^ bbl. 

Pillsbury  Best,  }4 bbl. 

Pillsbury  Best,  bbl bbl. 

Matches,  B.  &  C bx. 

Oysters,  1  lb.  Cove doz. 

Peaches,  Muir lb. 

Peas,  2  lb.  Menu doz. 

Prunes,  60-70  California lb. 

70-80  California lb. 

Salmon,  Columbia  River doz. 

Salt,  Michigan  3's bbl. 

Michigan  5's bbl. 

Michigan  kegs keg 

Sardines,  Messir cs. 

Shrimp,  1  lb.  Dried doz. 

1  gal.  Headless can 

2  gal.  Headless can 

21b.  Pickled doz. 

Soap,  Chicago  Family bx. 

Glycerine  Tar bx. 

Old  Brown bx. 

Santa  Claus bx. 

Tea,  Basket  Fired  Japan lb. 

Sun  Dried  Japan lb. 

Tomatoes,  2 lb  Pewaukee  Lake. . doz. 

3  lb.  Pewaukee  Lake doz 

Tobacco,  Star  Plug lb. 


1 

2 

3 

4 

5 

6 

7 

$0.10| 

$0,101 

$0,101 

$0.10i 

$0.11 

$0.10| 

$0,101 

1.19 

1.17 

1.20 

1.18 

1.22 

1.16 

1.20 

35.00 

34.50 

35.50 

34.00 

33.75 

34.75 

35.00 

65.00 

64.50 

65.75 

64.00 

64.75 

65.25 

64.50 

•17i 

•m 

.171 

■171 

.171 

.17J 

.17 

.141 

.141 

.141 

.141 

.141 

.141 

.141 

.141 

.141 

.141 

.141 

.141 

.14 

.141 

.241 

.24i 

.241 

.241 

.241 

.24 

.241 

•  111 

.llf 

.12 

.11 

.111 

lU 

•  lU 

1.621 

1.62 

1.65 

1.60 

1.55 

1.50 

1.60 

6.80 

6  75 

6  85 

6.70 

6.65 

6.80 

6.65 

6.75 

6.70 

6.80 

6.65 

6.60 

6.75 

6.60 

6.70 

6.65 

6.75 

6.60 

6.55 

6.70 

6.55 

1.57 

1.50 

1.60 

1.55 

1.58 

1.53 

1.54 

.92 

.91 

.93 

.95 

.94 

.921 

Ml 

.lOi 

.101 

.101 

.101 

.101 

.101 

.101 

1.40 

1.45 

1.50 

1.55 

1.47 

1.45 

1.50 

.101 

.10^ 

.101 

.101 

.101 

,10 

.091 

.10 

.lOi 

•  lOi 

.10^ 

.Hi 

.091 

.091 

1.25 

1.22 

1.24 

1.30 

1.26 

1.28 

1.20 

1.75 

1.70 

1.80 

1.85 

1.77 

1.79 

1.80 

1.70 

1.65 

1.75 

1.80 

1.79 

1.74 

1.75 

.95 

.92 

.96 

.97 

.94 

.95 

.94 

16.60 

15.90 

16.25 

16.00 

15.95 

15.75 

15.80 

1.10 

1.07 

i.m 

1.08 

1.09 

1.071 

1.08 

.75 

.70 

.77 

.80 

.79 

.81 

.76 

1.50 

1.40 

1.54 

1.55 

145 

1.47 

1.52 

2.20 

2.25 

2.30 

2.15 

2.17 

2.25 

2.19 

4.75 

4.65 

4  80 

4  60 

4.55 

4.85 

4.75 

5.90 

5.80 

5.95 

5.75 

5.65 

595 

5.90 

3.30 

3.10 

3.20 

3.15 

3.25 

3.35 

3.30 

4.85 

4.75 

4.90 

4.80 

4.70 

4.95 

4.85 

.37 

.36 

.37^ 

.38 

.361 

.351 

361 

.33 

.32 

.32i 

.31 

.32f 

.321 

33 

1.121 

1.10 

1.15 

1.14 

1.11 

1.09 

1.10 

1.371 

1.30 

1.35 

1.36 

1.34 

1.33 

1.35 

.62 

.60 

.61 

.59 

.581 

.58f 

.61 

0.11 
1.18 
34.00 
64.60 
.17i 
.141 
.141 
.241 
.111 
1.65 
6.70 
6.65 
6.60 
1.57 
.93 
101 
1.47 
.09 
.09 
1.22 
1.78 
1.82 
.93 
15.85 
1.07 
.78 
1.56 
2.21 
4.80 
5.95 
3.35 
4.90 
.371 
.331 
1.121 
1.371 
.60 


10 


$0,101 
1.17 
34.50 
64.70 
•171 
.141 
.141 
.24 

.Hi 

1.64 

6.85 

6.80 

6.75 

1.58 

.92 

.lOi 

1.46 

.10 

mi 

1.23 
1.76 
1.80 

.95 

16  10 

1.10 

.77 
1.54 
2.24 
4.60 
5.75 
3.15 
4.70 

.361 

.341 
1.15 
1.40 

.59 


$0.10f 

1.21 

34.75 

64.75 

171 

.14 

.14J 

.241 

.11 

1.65 

6.75 

6.70 

6.65 

1.59 

.90 

.101 

1.45 

.lOi 

.10 

1.21 

1.75 

1.80 

.96 

15.60 

1.06 

.75 

1.50 

2.30 

4.55 

5.60 

3.25 

4.75 

.37 

.35 

LIO 

1.35 

.58 


MEMORANDA  OF  TRANSACTIONS  FOR  JANUARY 

Herbert  Templeton  and  Ray  E.  Parker,  partners,  began  a  wholesale  grocery  business 
in  the  city  of  Chicago  under  the  firm-name  and  style  of  "Western  Grocery  House." 

The  terms  and  purposes  of  the  copartnership  are  set  forth  in  a  document  called 
"Articles  of  Co-Partner  ship,"  which  has  been  properly  executed,  signed  by  the  partners, 
and  witnessed.  Take  this  document  from  the  "Incoming  Papers"  envelope,  study  it 
carefully,  then  file  it  in  the  envelope  labeled  "Outgoing  Papers." 

The  firm  engages  you  as  bookkeeper  at  a  salary  of  $20.00  a  week,  Herbert  Slater  as 
shipping  clerk,  whose  wages  are  to  be  $20.00  a  week,  and  J.  C.  Kennedy  as  a  traveling 
salesman,  who  is  to  receive  a  salary  of  $100.00  a  month  and  traveling  expenses.    After 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    189 

three  months  Mr.  Kennedy  is  to  receive  a  bonus,  each  month,  equal  to  10%  of  the  gross 
profits  on  each  order  of  goods  which  he  sells.  The  salaries  of  each  partner,  as  stipulated 
by  their  agreement,  is  SI 00. 00  per  month. 

Mr.  Templeton  is  to  assume  the  duties  of  office  manager,  credit  manager,  and  corre- 
spondent; Mr.  Parker  will  do  the  buying  and  will  have  charge  of  the  stock. 

According  to  their  respective  duties, Mr. Templeton  will  O.K. all  orders  and  all  incoming 
invoices  for  office  supplies;  while  Mr.  Parker  will  O.  K.  all  invoices  for  merchandise,  stock 
room,  and  shipping  supplies.  All  invoices  will  come  to  you  O.  K.'d  as  to  quantities  and 
prices.  It  will  be  your  duty  to  examine  these  invoices  carefully  and  to  verify  their  exten- 
sions and  footings.  Adopt  some  form  of  check  mark  and  check  with  this  mark  which 
you  adopt  the  items  as  you  verify  them.  When  you  find  a  bill  to  be  correct,  place  your 
initials  below  those  of  Mr.  Parker  or  Mr.  Templeton. 

Jan.  2.  As  his  investment  in  the  firm,  Mr.  Templeton  delivers  to  you  his  personal  check 
for  S1600.00,  currency  amounting  to  S200.00,  and  two  promissory  notes; 
one  for  SIOOO.OO  and  one  for  $800.00.  The  notes  are  accepted  by  the  firm  at  face 
value. 

Detach  check  No.  1  from  the  pad  of  incoming  checks  and  drafts;  then  take  the  currency  from  the 
envelope  labeled  "Incoming  Papers."  Examine  the  check  carefully  to  see  that  it  is  properly  dated,  that  the 
written  amount  agrees  with  the  amount  in  figures,  that  it  bears  a  signature  and  that  it  is  made  payable  to 
the  firm.  Count  the  currency.  Now  make  one  entry  in  your  cash  book  for  this  cash  investment,  crediting 
the  account  of  Herbert  Templeton,  Partner;  then  place  both  the  check  and  the  currency  in  the  pocket 
labeled  "Cash  Drawer,"  which  is  a  part  of  the  pocket  file.  Detach  notes  No.  2  and  No.  3  from  the  pad, 
inspect  them  as  to  dates,  amounts,  signatures,  etc.,  just  as  you  did  the  check;  ask  the  teacher  to  endorse 
these  papers  to  the  firm.  First  make  entries  for  them  in  the  bill  book;  then  credit  Herbert  Templeton, 
Partner,  with  their  amount.    These  entries  are  made  in  the  journal.     Place  the  notes  in  the  cash  drawer. 

Jan.    2.  Mr.  Parker's  investment  consists  of  a  New  York  bank  draft  for  $1800.00. 

Detach  draft  No.  4  from  the  pad,  and  after  carefully  examining  it,  make  an  entry  for  it  in  the  cash 
book,  crediting  the  account  of  Ray  E.  Parker,  Partner.    Place  this  draft  in  the  cash  drawer. 

The  firm  has  made  arrangements  with  the  Merchants  Exchange  Bank  for  the  usual  banking  facilities. 
Therefore  you  may  now  deposit  the  check  and  the  bank  draft.  Take  these  papers  from  the  cash  drawer 
and  indorse  them  by  writing  on  the  back  of  each  paper  the  name  of  the  firm. 

Do  not  add  "p>er  (your  name)";  this  is  superfluous,  since  in  business  such  indorsements  are  usually 
made  with  a  rubber  stamp. 

Now  take  a  deposit  ticket  from  your  outfit  and  supply  the  necessary  information  to  complete  the 
deposit  ticket.  Next,  enter  the  amount  of  the  deposit  in  the  amount  column  on  the  stub  of  the  check 
book,  marking  it  "Deposit."  Place  the  check,  draft,  and  deposit  ticket  (the  latter  on  top)  in  your  bank 
book  (pass  book) ;  present  the  bank  book,  with  the  papers,  to  your  teacher,  who  represents  the  receiving 
teller  of  the  bank.    File  the  papers  in  the  pocket  headed  "Bank"  in  the  pocket  file. 

No  entry  for  this  deposit  is  to  be  made  in  your  books.  Cash  in  the  bank  is  the  same,  for  all  practical 
purposes,  as  cash  in  the  drawer. 

Jan.    2.  Pay  one  month's  rent  in  advance;  the  amount  of  the  rent  is  determined  by  a  lease. 

Take  the  lease  from  the  incoming  papers  envelope;  read  it  carefully;  then  file  it  in  the  Outgoing  Papers 
Envelope.  Pay,  in  currency,  the  amount  of  rent  stipulated  in  the  lease;  detach  from  the  pad  paper  No.  5 
which  is  the  receipt  for  the  rent.  Make  an  entry  in  the  Cash  Book,  charging  General  Expense  account. 
Enter  the  amount  in  the  proper  column;  and,  since  the  item  is  to  be  posted  in  the  total  of  the  coluirn, 
check  it  in  the  folio  column;  but  in  the  column  for  entries  charge  Rent,  which  is  one  of  the  accounts  compos- 


190  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

ing  the  General  Expense  group.  If  this  general  plan  of  indicating  the  sub-account  is  followed,  it  will  be 
a  simple  matter  to  analyze  the  General  Expense  Account  at  the  end  of  the  month,  because  the  sub-accounts 
may  be  readily  picked  out  from  among  the  other  charges.  File  the  currency  in  the  outgoing  papers  envelope 
and  the  receipt  in  the  paid  invoices  pocket  of  the  pocket  file. 

Jan.    3.  Receive  a  bill  from  The  A.  H.  Andrews  Co.  for  office  equipment,  which  has  been 
installed. 

Detach  bill  No.  1  from  the  pad  of  incoimng  bills.  This  is  not  a  bill  for  merchandise  and  it  is,  therefore, 
not  entered  in  the  purchases  book.  After  you  have  found  it  to  be  properly  O.  K.'d,  and  have  verified  and 
checked  its  extensions  and  footings,  make  an  entry  for  it  in  the  journal.  The  credit  amount  of  this  entry 
should  be  extended  into  the  column  of  the  journal  headed  "Accounts  Payable  Cr."  Treat  all  similar 
purchases  in  Hke  manner.  Why  is  this  bill  not  entered  in  the  purchases  book?  File  it  in  the  pocket  headed 
"Unpaid  Invoices." 

Jan.    3.  Receive  a  bill  from  the  Remington  Typewriter  Company  for  typewriter,  desk, 
and  supplies,  which  have  been  delivered. 

Detach  bill  No.  2  from  the  pad;  make  the  proper  entry;  then  file  it  in  the  unpaid  invoices  pocket. 

Jan.    3.  Receive  an  invoice  from  the  Waukesha  Canning  Co.  for  a  carload  of  canned 
goods  which  have  been  delivered  to  the  stock  room  and  checked  with  the  invoice. 

Detach  bill  No.  3.  This  is  an  invoice  for  merchandise.  Although  the  goods  were  shipped  Dec.  30, 
of  the  previous  year,  the  invoice  is  dated,  by  request  of  the  firm,  Jan.  2,  of  this  year.  It  bears  Mr.  Temple- 
ton's  O.  K.,  which  is  for  quantities  and  prices  only.  You  should  calculate  the  extensions  and  footings,  as 
you  have  on  the  other  bills. 

Note  the  terms  of  the  bill.  What  are  they?  When  must  the  firm  pay  this  bill  in  order  to  save  the 
discount?    Where  should  this  bill  be  filed? 

Jan.    3.  Receive  a  bill  from  the  Wisconsin  Central  Railway  Co.  for  freight  on  the  carload 
of  canned  goods  from  Waukesha.     Pay  it  in  currency. 

A  railroad  freight  bill  is  called  an  expense  bill.  Detach  No.  1  from  the  pad  of  expense  bills.  The 
weight  given  is  O.  K.'d  by  Mr.  Parker  as  approximately  correct,  also  the  rate.  Check  the  extensions  on 
this  bill;  then  pay  it  with  currency  from  the  cash  drawer,  and  have  it  receipted  by  your  teacher.  Make 
an  entry  for  it  in  the  cash  book,  charging  Freight-In  account.  File  it  in  the  paid  invoices  pocket,  and 
place  the  currency  in  the  outgoing  papers  envelope. 

When  paying  with  currency,  always  use  the  highest  possible  denominations;  in  paying  this  bill,  for 
example,  use  the  following:  one  SIO.OO  bill,  one  $5.00  bill,  two  $2.00  bills,  one  50c  piece  and  one  10c  piece. 

Jan.    3.  Mr.  Templeton  asks  you  to  hand  Mr.  J.  C.  Kennedy,  who  will  start  upon  a  trip 
this  morning,  $50.00  for  traveling  expenses. 

Take  the  money  (one  $50.00  bill)  from  the  cash  drawer  and  transfer  it  to  the  outgoing  papers  envelope. 
Charge  this  payment  to  J.  C.  Kennedy,  not  to  Traveling  Expense  account. 

Jan.    3.  Receive  a  bill  for  office  supplies  from  the  Rubel  Manufacturing  Co. 

Detach  bill  No.  4  from  the  pad  of  incoming  bills.  Make  the  proper  entry  for  it  in  the  journal,  charging 
General  Expense  account;  then  file  it  in  unpaid  invoices  pocket. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS     191 

Jan.    3.  Receive  order  No.  1,  which  has  just  been  taken  from  Mr.  Bredin  of  the  firm  of 
J.  W.  Bredin  &  Co.,  this  city. 

Detach  this  order  from  your  pad  of  orders  and  pass  it  to  the  shipping  clerk,  by  depositing  it  in  the 
pocket  which  is  headed  "shipping  clerk."  See  that  it  bears  Mr.  Templeton's  O.  K.  as  to  credit  before 
doing  so;  no  entry  is  to  be  made  for  it  until  the  goods  are  shipped  and  the  order  is  returned  by  the  shipping 
clerk. 

Jan.    3.  Receive  also  orders  No.  2  and  No.  3,  which  have  been  taken  from  city  customers, 
and  No.  4,  which  was  sent  in  by  Mr.  Kennedy,  the  traveUng  salesman. 

Treat  these  orders  as  you  did  order  No.  1.    Do  they  bear  proper  O.  K.'s  as  to  credit? 

Jan.    3.  Receive  a  bill  from  P.  F.  Pettibone  &  Co.,  terms  C.  O.  D.,  for  account  books 

and  miscellaneous  office  supplies. 

C.  O.  D.  denotes  "collect  on  dehvery,"  and  you  must  pay  this  bill  at  once  in  order  to  obtain  possession 
of  the  goods.  Detach  bill  No.  5  from  the  pad  of  incoming  bills,  verify  and  check  its  extensions  and  footings. 
Pay  it  with  currency  and  make  an  entry  charging  General  Expense  account.  File  it,  after  you  have  had 
it  receipted  by  your  teacher,  in  the  paid  invoices  pocket.     File  the  currency  in  the  outgoing  papers  envelope. 

Jan.    4.  The  shipping  clerk  returns  order  No.  1,  as  the  goods  have  been  delivered. 

Take  this  order  from  the  shipping  clerk's  file,  extend  the  amounts  of  the  items  into  the  proper  column 
and  foot  the  extensions.  Then  take  a  blank  billhead  from  your  outfit  and  prepare  the  bill.  In  billing, 
first  insert  the  date,  which  should  be  the  date  of  shipping;  next,  fill  in  the  customer's  name  and  address; 
then,  write  the  terms  in  the  proper  space  and  copy  the  items  and  amounts  exactly  as  they  appear  on  the 
order  blank.  When  you  have  done  this,  write  the  date  of  the  bill  on  the  order  blank  in  the  space  which  is 
headed  "date  billed." 

Have  the  bill  O.  K.'d  by  your  teacher;  then  place  it  in  the  outgoing  papers  envelope. 

Now  post  the  amount  of  this  order.  Turn  to  J.  W.  Bredin  &  Co.'s  account  in  the  customers'  ledger 
(Account  No.  1),  and  post  the  amount  according  to  the  illustration  of  Bredin  &  Co.'s  account  which  is 
given  on  page  185. 

Write  the  number  of  the  account  in  the  space  on  the  order  blank  headed  "ledger  folio",  and  insert  the 
order  blank,  which  is  now  the  first  page  of  the  sales  book,  in  the  sales  binder. 

Jan.    4.  Receive  an  invoice  from  the  Pillsbury-Washburn  Flour  Mills  Co.,  Limited,  for 
flour,  which  has  been  delivered  on  Mr.  Parker's  order. 

Detach  bill  No.  6  from  the  pad  and  treat  it  as  you  did  bill  No.  3. 

As  you  will  be  required  to  sign  all  checks,  it  is  necessary  for  you  to  have  a  Power  of  Attorney.  Mr. 
Parker  and  Mr  Templeton  have  joined  in  executing  this  instrument. 

Take  the  Power  of  Attorney  from  the  incoming  papers  envelope  and  read  it  carefully.  Have  your 
teacher  WTite  your  name  in  the  proper  space.  This  instrument  bestows  upon  you  the  privilege  of  signing 
the  firm  name  to  all  checks,  drafts,  receipts,  and  notes.  Since  you  have  this  privilege,  the  Merchants 
Exchange  Bank  will  now  require  you  to  record  your  signature  at  the  bank.  This  signature  will  be  in  the 
following  form: 

Western  Grocery  House, 
Per  (your  name). 

When  making  indorsements  on  checks  for  deposit,  it  is  not  necessary  to  use  "per  (your  name)",  the 
reason  for  which  has  already  been  explained;  but  when  signing  checks  this  is,  for  obvious  reasons,  necessary. 
It  is  imperative  also  that  the  style  of  your  signature  should  always  be  the  same. 


192  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

You  will  find  in  the  incoming  papers  envelope  a  signature  card;  fill  this  out  properly.  Exhibit  both 
the  Power  of  Attorney  and  the  signature  card  to  your  teacher,  who  represents  the  bank  cashier,  and  deliver 
the  signature  card  to  the  bank  by  filing  it  in  the  bank  pocket.  Deliver  the  Power  of  Attorney  to  the  bank 
by  placing  it  in  the  bank  file. 

The  student  must  not  infer  from  the  fact  that  a  Power  of  Attorney  to  sign  checks,  etc.,  is  given  to  the 
bookkeeper  in  this  set,  that  such  is  the  general  custom;  this  privilege  is  seldom  conferred  upon  an  employee. 

Jan.    4.  Receive  an  invoice  of  soaps  from  The  N.  K.  Fairbank  Company. 

Detach  bill  No.  7,  and  treat  it  as  you  have  treated  similar  bills. 

Jan.    4.  The  shipping  clerk  returns  orders  No.  2  and  No.  3,  showing  deliveries. 

Follow  the  instructions  given  for  order  No.  1.  Each  of  these  orders  contains  30-day  and  60-day  items. 
Extend  the  amounts  in  the  proper  columns.  Prepare  one  bill  for  the  30-day  items  and  one  for  the  60-day 
items.  Also  post  the  biUs  separately.  Study  the  illustrative  accounts  on  page  185.  File  these  orders 
numerically. 

Jan.    4.  Receive  an  invoice  for  shrimp  and  oysters  from  the  Biloxi  Canning  Co. 

Detach  bill  No.  8  from  your  pad.  This  invoice  is  dated  Jan.  4,  19 — ,  though  the  goods  were  shipped 
Dec.  29,  19 — .    The  "post-dating"  is  an  accommodation  to  the  new  firm.     Make  the  proper  entry. 

Jan.    4.  Receive  an  expense  bill  from  the  Chicago  &  Eastern  IlHnois  Railway  Co.  for 
freight  on  the  shipment  from  Biloxi.     Pay  this  bill  by  check. 

Detach  expense  bill  No.  2.     Verify  and  check  it. 

Take  the  check  book  from  your  outfit.  First  fill  out  the  stub,  entering  upon  it  a  proper  number  (No.  1), 
the  date,  to  whom  paid,  for  what  paid,  and  the  amount.  Then  extend  the  amount  to  the  column  on  the 
right  and  subtract  this  amount  from  the  amount  of  the  deposit,  which  was  entered  on  January  2.  Now 
write  the  check  in  the  proper  manner. 

Have  your  teacher  examine  it,  also  have  him  receipt  the  expense  bill;  then  file  the  check  in  the  outgoing 
papers  envelope  and  the  expense  bill  in  the  paid  invoices  pocket. 

Make  the  proper  entry  for  the  check. 

Jan.    4.  Orders  No.  5  and  No.  6  were  received  from  customers  who  called  at  the  office. 
If  these  orders  are  properly  certified  as  to  credit,  pass  them  to  the  shipping  clerk. 

Jan.    5.  The  goods  for  order  No.  4  have  been  shipped. 

Treat  this  order  as  you  have  treated  all  previous  orders. 

Jan.    5.  Our  salesman  (Kennedy)  sent  in  an  order,  which  has  been  recorded  as  order  No.  7. 
Receive  it  and  treat  it  in  the  usual  manner. 

5.  The  shipping  clerk  returns  order  No.  5;  the  goods  have  been  delivered. 

6.  Receive  an  invoice  from  The  Diamond  Match  Co.  (No.  9),  also  two  invoices  from 
The  J.  K.  Armsby  Co.  (No.  10  and  No.  11). 

6.  The  shipping  clerk  returns  orders  No.  6  and  No.  7. 

6.  Receive  order  No.  8,  sent  in  by  Kennedy. 

7.  Kennedy's  traveling  expenses  for  the  week,  January  2  to  7,  have  been  $15.60. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    193 

Make  a  journal  entry,  charging  Traveling  Expense  account  and  crediting  J.  C.  Kennedy's  account; 
supply  the  proper  explanations.  The  amounts  of  this  entry  should  be  placed  in  the  general  ledger  columns 
only. 

Jan.    7.  Pay  .$2.50  in  currency  for  postage  stamps. 

Transfer  the  currency  from  the  cash  drawer  to  the  outgoing  papers  envelope.  Make  the  proper  entry, 
charging  General  Expense  account.    Enter  the  amoxmt  in  the  general  expense  column  and  check  the  entry. 

Jan.    7.  Pay  the  salaries  due  today. 

By  examining  the  currency  in  the  cash  drawer,  you  have  found  that  there  is  not  enough  cash  with  which 
to  pay  the  salaries.  Since  you  may  need  this  currency  with  which  to  pay  petty  cash  items  during  the  follow- 
ing week,  you  are  requested  to  draw  from  the  bank  the  amount  of  cash  necessary  to  pay  the  salaries.  Write 
a  check  payable  to  "currency"  for  $40.00;  draw  the  cash  and  distribute  the  salaries. 

The  bank  requires  checks  payable  to  "currency",  to  be  indorsed  by  the  person  who  receives  the  money 
at  the  bank.  Indorse  the  check  with  your  name  only.  Fill  out  the  stub  of  the  check  book  properly  and 
deduct  the  amount  of  the  check  from  the  previous  balance. 

Charge  the  shipping  clerk's  wages  to  Box  &  Shipping  account. 

Jan.    9.  Receive  orders  No.  9  and  No.  10. 

9.  Order  No.  8  is  returned  by  the  shipping  clerk. 

9.  G.  A.  &  C.  L.  Adkins  claim  that  the  headless  shrimp  which  were  sold  to  them 
on  the  5th  inst.,  are  not  of  the  quality  which  the  firm  represented  them  to 
be.  Therefore,  they  ask  the  privilege  of  returning  the  shrimp;  but,  if  an  allowance 
of  55c  a  case  is  made,  Adkins  will  keep  them.  The  firm  consents  to  the  latter 
offer. 

Make  an  entry  in  the  sales  rebates  and  allowances  book  for  this  allowance.  Supply  the  proper  explana- 
tion. Then  take  a  credit  memorandum  blank  from  your  outfit  and  fill  out  this  blank  in  the  proper  manner. 
Have  it  O.  K.'d  by  your  teacher,  and  file  it  in  the  outgoing  papers  envelope.  Post  the  entry  to  the  customer's 
account. 

Jan.  9.  If  the  business  desires  to  discount  its  bills,  it  must  send  its  remittances  so  that 
they  may  reach  their  destinations  on,  or  before  the  day  on  which  the  bills  are 
due.  The  invoice  of  Jan.  2  from  the  Waukesha  Canning  Co.  is  due  in  Waukesha 
on  the  12th  inst.  Therefore  you  should  pay  this  bill  today.  Write  a  check  for 
the  proper  amount,  and  make  the  proper  entry. 

Draw  a  check  for  the  net  amount.  Chicago  "paper"  is  current  in  Waukesha  and  therefore  no  exchange 
is  to  be  included  in  the  check.    File  the  check  in  the  outgoing  papers  envelope. 

Jan.  10.  Receive  an  invoice  for  coffees  from  Westfeldt  Bros. 
Detach  bill  No.  12.    Treat  it  in  the  usual  manner. 

Jan.  10.  The  terms  of  the  invoice  just  received  are  as  follows:  "60  days — Net  2% — 
Spot  Cash  on  receipt  of  pro  forma  invoice."  Although  the  coffee  has  not  arrived, 
the  invoice  must  be  paid  at  once  in  order  to  save  the  discount.  You  are,  therefore, 
mstructed  to  pay  this  invoice  by  check. 


194  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Follow  the  instructions  which  were  given  when  you  paid  the  invoice  of  the  Waukesha  Canning  Co. 
You  should  include  exchange  in  this  check,  as  a  Chicago  check  is  not  current  in  New  York.  The  charge 
for  collecting  the  check  will  be  l/lO  of  1%;  therefore  the  amount  to  be  added  to  the  net  amount  of  the  bill 
is  $1.19.    Make  an  entry  for  the  exchange,  charging  General  Expense  account. 

Jan.  10.  Receive  orders  No.  11  and  No.  12,  left  by  customers  who  called. 
10.  The  shipping  clerk  returns  order  No.  9. 

10.  Receive  order  No.  13,  sent  in  by  mail. 

11.  Receive  an  expense  bill  from  the  Pennsylvania  Railroad  Company  for  the  ship- 
ment of  coffee,  which  has  been  received  (No.  3) .  Pay  the  expense  bill  by  check, 
and  make  the  proper  entry. 

11.  Pay,  by  check,  the  invoices  of  The  J.  K.  Armsby  Co.  of  the  6th  inst.,  and  make 
the  proper  entry. 

These  bills  are  due  today.  Armsby  &  Co.  are  located  in  the  city;  consequently,  if  the  check  is  sent 
promptly,  it  will  reach  them  within  the  proper  time. 

Jan.  11.  Receive  check  from  J.  W.  Bredin  &  Co.  in  settlement  of  bills  of  January  4  and  6. 
Make  the  proper  entry. 

Detach  check  No.  6  from  your  pad.  Compute  the  discount  to  which  Bredin  &  Co.  are  entitled;  you 
may  obtain  data  from  their  account  in  the  ledger. 

Post  these  credits  to  the  account  with  Bredin  &  Co.  But,  before  doing  this,  be  sure  you  understand 
the  instructions  for  posting  to  the  accounts  receivable  ledger.  The  instructions  were  given  on  a  previous 
page.    Study  the  illustration  of  the  account  with  Bredin  &  Co.  on  page  185. 

Posting  to  the  personal  accounts  of  customers  should  be  kept,  as  near  as  possible,  up  to  date,  since  it 
is  necessary  to  know  at  all  times  the  standing  of  these  accounts.  It  is  not  advisable  to  defer  until  the  end 
of  the  month  posting  to  personal  accounts. 

Jan.  11.  Receive  order  No.  14. 

Jan.  12.  Receive  orders  No.  15  and  No.  16,  both  sent  in  by  Mr.  Kennedy. 

12.  The  shipping  clerk  turns  in  orders  No.  10  and  No.  11  as  shipped. 
12.  Receive  invoice  of  salt  from  the  International  Salt  Co. 

12.  Determine  the  amount  of  cash  balance.  Several  large  bills  will  mature  in  a  few 
days.  The  partners  have  conferred  in  regard  to  discounting  at  the  bank  the  note 
which  was  a  part  of  the  investment  of  Mr.  Templeton  on  Jan.  1 ,  and  which  was 
made  by  Mr.  Erskine.       The  bank  has  agreed  to  discount  it  at  6%. 

Compute  the  discount  and  indorse  the  note.  Your  Power  of  Attor  ley  gives  you  authority  to  do  this. 
Since  this  is  not  an  indorsement  for  deposit,  you  must  add  your  name  to  the  indorsement. 

Your  teacher,  who  represents  the  note  teller  of  the  bank,  will  enter  t':3  amount  of  the  proceeds  in  your 
pass  book.  This  is  equivalent  to  making  a  deposit,  and  you  should  enter  on  the  stub  of  your  check  book 
the  amount  of  the  proceeds.  Enter  the  amount  of  the  note  on  the  debit  side  of  the  cash  book  and  the 
amount  of  the  discount  on  the  credit  side  of  the  cash  book,  deb'iing  Interest  account.  In  your  notes 
receivable  book  make  the  proper  notation  for  the  discounting  of  this  note.     File  the  note  in  the  bank  pocket. 

Jan.  12.  Pay,  by  check,  the  bill  of  the  Pillsbury-Washburn  Flour  Mills  Co.,  Limited,  of 
the  4th.     Follow  instructions  given  previously. 

13.  Order  No.  12  is  returned  by  the  shipping  clerk,  also  order  No.  13. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    195 

Order  No.  13  was  received  by  mail;  but  no  prices  were  agreed  upon  at  the  time  the  order  was  received . 
You  are  to  supply  prices  from  the  lists  of  Variable  Selling  Prices  which  are  given  on  page  188.  Ask  your 
teacher  to  assign  to  you  one  of  these  hsts.  For  all  mail  orders  use  the  hst  which  has  been  assigned  to  you, 
as  the  use  of  this  hst  will  cause  your  results  to  differ  from  the  results  of  another  who  has  a  different  price 
list. 

Jan.  13.  Receive  a  check  from  J.  H.  Walters  &  Bro.  in  payment  of  invoices  of  the  4th. 
(No.  7) 
13.  Receive  a  check  (No.  8)  from  C.  E.  Brooks  &  Bro.,  in  settlement  of  invoices  of 
the  4th.     Receipt  the  bills. 

13.  Pay,  by  check,  the  bill  of  the  Rubel  Mfg.  Co.  of  the  3d. 

Make  the  payment  and  entries  as  usual;  take  the  bill  from  the  unpaid  invoices  pocket  and  file  it  in  the 
paid  invoices  pocket. 

Jan.  13.  Pay,  by  check,  the  invoice  of  the  Biloxi  Canning  Co.  of  the  4th. 

Chicago  paper  is  at  par  in  Biloxi;  therefore  no  exchange  is  to  be  included  in  the  check. 

Jan.  14.  Deposit  all  checks  on  hand.     (Retain  the  currency.) 

14.  Pay  the  salaries  for  the  week. 

Follow  instructions  (relative  to  paying  salaries)  which  were  given  to  you  on  the  7th. 

Jan.  14.  Receive  Mr.  Kennedy's  report  for  the  week,  Jan.  9  to  14,  of  traveling  expenses 

which  amount  to  $22.50.     Make  the  proper  entry. 
14.  Pay,  by  check,  the  invoice  of  The  N.  K.  Fairbank  Company  of  the  4th. 
16.  Draw  a  check  for  traveling  expenses,  for  $50.00  in  favor  of  J.  C.  Kennedy.     This 

check  is  to  be  sent  to  him. 
16.  Receive  order  No.  17,  which  was  sent  in  by  Mr.  Kennedy. 
16.  Pay,  by  check,  the  invoice  of  the  6th  of  The  Diamond  Match  Co. 
16.  Orders  No.  14,  No.  15,  and  No.  16  have  been  filled,  and  the  goods  shipped. 

16.  Receive  check  (No.  9)  from  the  A.  M.  Royce  Grocery  Co.  in  payment  of  bills  of 
the  6th. 

This  check  includes  10c  exchange,  which,  in  turn,  j'ou  must  pay  to  the  bank  when  the  check  is  de- 
posited. Make  a  separate  entry  for  the  exchange;  place  the  amount  in  the  "general"  column  and  credit 
General  Expense  account. 

Jan.  17.  Receive  orders  No.  18,  No.  19,  and  No.  20;  the  latter  was  sent  in  by  the  traveling 
salesman. 

17.  Receive  check  (No.  10)  from  L.  S.  Terrell  &  Co.  in  settlement  of  bills  of  the  9th. 
This  check  includes  exchange,  10c. 

17.  Receive  order  No.  21,  which  was  forwarded  to  the  firm  by  mail  and  which  was 
copied  on  one  of  the  regular  order  blanks. 

17.  The  goods  for  order  No.  17  have  been  shipped. 

18.  Receive  from  The  American  Sugar  Refining  Co.  an  invoice  for  sugar  (No.  14). 


196  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Sugar  is  sold  by  the  refining  company  "freight  paid."  It  is  put  up  in  barrels,  the  contents  of  which 
weigh  from  330  to  360  lbs.;  but  the  average  weight  is  about  350  lbs.  It  is  also  put  up  in  sacks,  the  contents 
of  which  weigh  100  lbs.  uniformly.     100  barrels  or  400  sacks  always  constitute  one  carload. 

Wholesalers  and  jobbers  who  deal  in  the  products  of  The  American  Sugar  Refining  Co.  are  required 
by  that  company  to  make  a  separate  bill  and  a  separate  order  blank  for  each  sale  of  sugar  manufactured 
by  The  American  Sugar  Refining  Co.  Therefore,  when  an  order  is  received  which  includes  sugar  with 
other  goods,  a  separate  order  is  made  out  for  the  sugar  and  it  must  be  billed  separately;  but  all  the  goods 
for  the  order  are  shipped  together. 

Note  the  terms  which  are  as  follows:  "Cash  1% — 7  days,  New  York  Funds." 

Jan.  18.  Receive  a  check  (No.  11)  from  C.  E.  Brooks  &  Bro.  for  the  30-day  bill  of  Jan.  12th. 
18.  The  goods  for  orders  No.  18  and  No.  19  have  been  shipped. 

18.  L.  M.  Wetzel  also  complains  of  the  quality  of  the  headless  shrimp  which  were 
sold  to  him  on  the  16th.  Allow  him  15c  per  can,  send  him  a  credit  memorandum, 
and  make  the  proper  entry. 

19.  Receive  a  bill  from  the  Joseph  Stockton  Co.  for  teaming,  and  pay  it  by  check. 

Detach  bill  No.  15.  Observe  that  this  bill  is  not  O.  K.'d  by  Mr.  Parker  or  by  Mr.  Templeton.  You 
are  to  determine  the  correctness  of  it,  and,  if  it  is  found  correct,  to  O.  K.  it.  Charge  Freight  &  Cartage- 
Out  account. 

Verify  it  as  follows:  turn  to  order  No.  4,  which  was  shipped  on  Jan.  5  via  the  C.  B.  &  Q.  R.  R.;  you 
will  find  that  this  order  contains  4  cases  of  peas,  6  cases  of  corn,  7  cases  of  oysters,  and  10  cases  of  shrimp; — 
27  pieces  in  all,  which  number  talhes  with  the  nmnber  given  on  the  bill.  Now,  turn  to  order  No.  7.  You 
will  notice  that  this  order  contains  8  bbl.  of  flour,  3  bbl.  of  flour  (in  H  sacks),  4  cases  of  matches,  and  3 
cases  of  salmon;  apparently  only  18  pieces,  while  the  bill  has  39.  This  discrepancy  is  caused  by  the  number 
of  sacks  of  flour,  which  are  counted,  instead  of  the  number  of  barrels.  The  difference  between  the  number 
of  barrels  (3)  and  the  number  of  sacks  (24, — 8  to  a  barrel)  accounts  for  this  seeming  discrepancy  and  gives 
the  correct  number  of  pieces.  Then  turn  to  order  No.  8,  which  contains  19  pieces,  and  to  order  No.  13, 
which  contains  (by  counting  the  sacks  of  flour  instead  of  barrels)  95  pieces.  Compute  the  items  at  5c  a 
piece.     O.  K.  the  bill,  write  your  initials  below  the  O.  K.,  pay  the  bill,  and  file  both  the  bill  and  the  check. 

Jan.  20.  The  shipping  clerk  returns  orders  No.  20  and  No.  21,  the  goods  for  which  have 
been  shipped. 

Remember  that  you  must  affix  prices  to  the  items  in  order  No.  21  according  to  the  price  list  assigned 
to  you  by  your  teacher.     Be  sure  not  to  use  another  price  Ust;  if  you  do,  your  results  will  be  wrong. 

Jan.  20.  J.  W.  Chaffee  &  Co.  also  complain  of  the  headless  shrimp  which  were  sold  to  them 
on  the  16th.  Allow  them  a  rebate  of  15c  per  can,  prepare  a  credit  memorandum 
and  make  the  proper  entry  for  this  credit. 

20.  Deliver  to  the  shipping  clerk  order  No.  22,  which  has  just  been  received  from 
the  traveling  salesman. 

20.  Receive  check  (No.  12)  from  the  L.  E.  Megan  Grocery  Co.  for  bills  of  the  12th. 
20.  Receive  credit  memorandum  from  the  Biloxi  Canning  Co.,  for  rebate  on  the  head- 
less shrimp  found  to  be  of  poor  quality  (No.  16). 

Make  an  entry  for  this  credit  memorandimi  in  the  purchases  rebates  and  allowances  book. 

Jan.  20.  Receive  check  (No.  13)  from  J.  H.  Walters  &  Bro.  in  payment  of  bills  of  the  10th. 
20.  Receive  check  (No.  14)  from  G.  A.  &  C.  L.  Adkins  for  the  60-day  bill  of  the  13th. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    197 

Jan.  20.  Receive  check  (No.  15)  from  J.  W.  Bredin  &  Co.  in  settlement  of  bills  of  the  16th. 

20.  Deposit  all  checks  on  hand. 

The  bank  will  charge  20c  exchange  (ICkj  each  on  the  Naperville  and  Aurora  checks).  In  business 
some  houses  wall  pay  the  exchange  in  cash,  and  have  the  total  deposit  placed  to  their  credit;  others  will 
have  the  exchange  deducted  from  the  deposit  and  the  remainder  placed  to  their  credit.  Follow  the  latter 
method,  make  the  deductions  on  your  deposit  ticket,  and  have  your  teacher  enter  the  correct  amount  in 
your  pass  book.  Make  an  entry  for  the  exchange,  which  is  charged  to  General  Expense  account,  on  the 
credit  side  of  your  cash  book. 

Jan.  20.  Pay,  by  check,  The  American  Sugar  Refining  Co.'s  invoice  of  the  15th. 

Since  this  bill  is  payable  in  "New  York  funds",  you  must  include  in  the  amount  of  the  check,  an  amount 
equal  to  1  / 10  of  1  %,  which  is  charged  by  members  of  the  New  York  Clearing  House  Association  for  collecting 
the  check.     Make  a  separate  entry  for  the  exchange. 

Jan.  21.  Receive  order  No.  23. 

21.  Pay  the  salaries  in  the  usual  manner. 

21.  Pay  $2.00,  in  currency,  for  postage  stamps. 

21.  Mr.  Kennedy's  traveling  expenses  for  the  week,  January  16  to  21,  have  been 

$25.67. 
23.  Order  No.  22  is  returned  by  the  shipping  clerk. 

23.  Receive  order  No.  24,  which  was  sent  in  by  mail. 

24.  Order  No.  23  has  been  returned  by  the  shipping  clerk. 

24.  Receive  an  order  by  mail  and  record  it  as  No.  25. 

25.  Order  No.  24  is  returned  by  the  shipping  clerk. 

25.  Receive  an  invoice  for  matches  from  The  Diamond  Match  Co.  (No.  17). 

26.  The  shipping  clerk  returns  order  No.  25;  the  goods  have  been  shipped.     Use 
prices  from  your  price  list. 

27.  Receive  check  (No.  16)  from  Benj.  Tamer  in  settlement  of  the  60-day  bill  of 
the  5th. 

This  is  an  out-of-town  check,  but  it  is  not  subject  to  exchange,  owing  to  the  fact  that  LaGrange  is 
located  in  the  same  county  (Cook)  as  Chicago.  No  exchange  is  charged  in  Chicago  on  checks  drawn  on 
banks  in  Cook  county. 

Jan.  27.  Deposit  the  check  just  received. 

27.  Receive  order  No.  26. 

27.  Receive  a  bill  for  advertising  (No.  18)  from  The  Grocers'  Criterion  Company. 
Pay  it  by  check.     Charge  Advertising  account. 

27.  Receive  an  invoice  of  soaps  from  The  N.  K.  Fairbank  Co.  (No.  19). 

28.  Order  No.  26  has  been  returned  by  the  shipping  clerk. 
28.  Receive  order  No.  27. 

Although  this  order  is  received  from  an  out-of-town  customer,  it  is  not  a  mail  order,  which  is  subject 
to  variable  prices.  While  on  a  visit  in  Chicago,  Mr.  Helmer  of  the  Tri  City  Grocery  Co.  gave  the  order, 
and,  since  he  is  unknown  to  our  firm  he  asked  that  the  goods  be  shipped  C.  O.  D.  Read  the  notation 
at  the  bottom  of  the  order  blank. 

Jan.  28.  Receive  check  (No.  17)  from  J.  H.  Walters  &  Bro.  for  the  two  30-day  bills  of  the 

18th. 


198  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Jan.  28,  Mr.  Kennedy's  traveling  expenses  for  the  week,  Jan.  23  to  28,  have  been  $23.85. 
28.  Receive  an  invoice  for  packing  boxes  from  Rathborne,  Hair  &  Ridgway  Co. 
(No.  20). 

Note  that  it  is  dated  Jan.  2,  and  marked  "Duplicate."  This  bill  was  rendered  by  request  of  Mr.  Parker, 
whose  attention  had  been  called  to  the  fact  that  no  bill  for  boxes,  received  early  in  the  month,  was  on 
file  in  the  office.  The  original  bill,  if  it  had  been  received  at  all,  had  probably  been  lost  in  the  shipping 
room.     Charge  Box  &  Shipping  account.     Use  Jan.  2  as  the  date  of  the  entry. 

Jan.  28,  Pay  the  salaries  in  the  usual  manner.    Include  $8.00  for  assistant  shipping  clerk. 
30.  Receive  check  (No.  18)  from  the  Shaw  Grocery  Co.  for  bills  of  the  20th.     This 

check  includes  an  amount  for  exchange. 
30.  Deposit  all  checks  on  hand.     Pay  exchange. 

Follow  instructions  given  when  paying  exchange  January  20. 

Jan.  30.  Draw  a  check  for  $50.00  to  be  sent  to  J.  C,  Kennedy. 
30,  Receive  orders  No.  28  and  No.  29. 

30.  Order  No.  27  is  returned  by  the  shipping  clerk.     There  is  a  Bill  of  Lading  with 
the  order. 

To  ship  goods  C.  O.  D.,  by  freight,  is  common  in  a  mercantile  business.  You  will  do  well  to  study 
the  procedure  for  a  C.  O.  D.  shipment.  Do  not  pass  this  transaction  until  you  are  entirely  familiar  with  the 
procedure. 

The  order  blank  bears  the  following  notice:  "Ship  to  order  of  Western  Grocery  House;  notify  Tri 
City  Grocery  Co."  The  shipping  clerk  has  marked  the  cases  with  this  notice  and  the  commercial  agent 
of  the  railroad  company  has,  on  presentation  of  the  shipping  receipt,  issued  a  Bill  of  Lading.  To  prevent 
issuing  a  second  B/L  he  has  stamped  upon  the  freight  receipt,  which  he  retains,  the  following:  "Bill  of 
Lading  issued  on  this  receipt." 

Take  the  Bill  of  Lading  from  the  incoming  papers  envelope.  Indorse  it  "Western  Grocery  House,  per 
(your  name)."  Draw  a  draft,  at  sight,  on  the  Tri  City  Grocery  Co,  for  the  amount  of  the  bills,  less  discount, 
and  make  this  draft  payable  to  the  order  of  the  First  National  Bank,  CUnton,  Iowa,  Write  an  appropriate 
letter  to  the  bank;  when  this  has  been  approved  by  your  teacher,  mail  the  letter,  the  draft,  and  the  endorsed 
Bill  of  Lading  which  are  pinned  together  by  filing  them  in  the  outgoing  papers  envelope.  Send  to  the 
customer,  the  bills,  regularly  made  out  but  bearing  the  following  notation:  "B/L  at  First  National  Bank." 

The  railroad  company  will  not  deUver  the  goods  until  the  B/L,  properly  endorsed,  is  produced.  The 
Tri  City  Grocery  Co.  must  pay  the  draft,  which  is  at  the  bank,  and  secure  the  B/L,  with  which  to  procure 
{x)ssession  of  the  goods. 

Post  the  bills  to  C.  O.  D,  account,  using  the  explanation  "Tri  City  Grocery  Co."  in  the  "Items"  column. 

Jan.  31.  Receive  bill  from  the  Joseph  Stockton  Co.  for  teaming  (No.  21).     Pay  it  by  check. 

Verify  this  bill  as  you  did  a  previous  teaming  bill  and  O.  K.  it.    J^  cases  are  counted  as  one  piece. 

Jan.  31.  The  firm  has  been  advised  by  The  American  Sugar  Refining  Co.  that  it  is  entitled 
to  a  credit  of  $71.08  as  a  rebate  on  purchases  of  sugar  during  January.  Make 
the  proper  entry. 

31.  The  goods  for  orders  No.  28  and  No.  29  have  been  shipped. 

31.  Give  Mr.  Templeton,  Mr.  Parker,  and  Mr.  Kennedy  credit  through  the  journal 
for  their  respective  salaries. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    199 

Charge  the  amount  of  the  salaries  allowed  to  Templeton  and  Parker  to  Administrative  Expense. 
Charge  the  amount  of  the  salary  allowed  to  Kennedy  to  Salesmen's  Salaries. 

Jan.  31.  Pay  Mr.  Kennedy's  salary  by  check. 

ADJUSTING  ENTRIES  PREPARATORY  TO   CLOSING  THE  BOOKS 

Jan.  31.  Interest  for  three  months  has  accrued  on  the  note  receivable  which  was  made  by 
A.  A.  Blair. 

Make  a  journal  entry  for  this  accrual  of  interest.  Charge  Accrued  Interest  account  and  credit  Interest 
account. 

Jan.  31.  All  employees  (except  J.  C.  Kennedy)  are  paid  each  week.  The  last  pay-day  was 
Jan.  28;  and  (since  the  next  day  is  Sunday)  two  days'  wages  have  been  earned 
by  the  employees. 

Part  of  this  accrual  is  to  be  charged  to  General  Exj)ense  account  and  part  to  Box  &  Shipping  account, 
but  the  total  is  to  be  credited  to  Accrued  wages  account.     Make  the  proper  journal  entry. 

Jan.  31.  The  office  equipment  has  depreciated  during  the  month  and,  in  order  to  show 
correct  results,  this  loss  must  be  considered.  Estimate  the  depreciation  at  23^% 
of  the  cost  of  the  office  equipment. 

Make  a  journal  entry  charging  the  amount  of  the  depreciation  to  General  Expense  account  and  crediting 
a  like  amount  to  Reserve  for  Depreciation  of  OflSce  Equipment  account. 

MERCHANDISE  INVENTORY  AND  PREPAID  EXPENSES 

Merchandise  on  hand,  January  31,  $2895.63.    This  amount  includes  freight  paid. 

Advertising— %  of  the  bill  of  The  Grocers'  Criterion  Co.,  $21.67. 

Box  and  Shipping — Boxes  on  hand,  at  cost,  $12.50. 

General  Expense — Unused  stationery  and  office  suppUes,  at  cost,  $10.00. 

PROGRAM  FOR  CLOSING 

1.  Obtain  (in  pencil)  the  total  of  each  column  in  the  books  of  original  entry.  Prepare 
a  recapitulation  of  the  sales. 

2.  Prepare  a  recapitulation  of  the  debit  side  of  the  cash  book. 

3.  Prepare  a  recapitulation  of  the  credit  side  of  the  cash  book. 

4.  Verify  the  balance  of  the  cash  book  by  comparing  this  balance  with  the  total  of  the 
balance  of  the  check  book  and  the  balance  of  currency  on  hand. 

5.  Prepare  a  recapitulation  of  the  journal;  remember  that  the  total  debits  must  equal 
the  total  credits. 

6.  Test  the  correctness  of  the  subsidiary  ledgers. 

In  business  houses  in  which  the  bookkeeping  is  done  by  several  persons,  the  accounts 
receivable  usually  are  kept  by  one  or  more  employees,  who  give  their  entire  time  to  this 
work.  The  head  bookkeeper  is,  in  most  instances,  directly  responsible  for  the  correctness 
of  the  general  ledger  accounts.  Therefore,  in  order  to  test  the  correctness  of  a  subsidiary 
ledger,  the  person  in  charge  of  the  subsidiary  ledger  prepares  a  list  of  the  balances  of  that 
ledger  and  compares  the  total  of  his  list  with  the  balance  of  the  controlling  account,  which, 
in  the  meantime,  has  been  obtained  by  the  head  bookkeeper. 


200  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

7.  Close  and  rule  the  books  of  original  entry. 

In  the  explanatory  column  of  the  purchases  rebates  and  allowances  book,  on  the  first 
blue  line  which  has  not  been  used  for  an  entry,  insert  the  following:  "Accounts  Payable 
Dr."  and  "Purchases  Rebates  &  Allowances  Cr."  Opposite  these  terms  and  on  the  blue 
line  with  them,  record,  in  black  ink,  in  the  second  amount  column  the  total  (for  the  month) 
of  the  rebates  and  allowances  by  creditors.  Then  rule  this  book  as  you  ruled  the  purchases 
book. 

In  the  explanation  column  of  the  sales  rebates  and  allowances  book,  on  the  first  blue 
line  which  has  not  been  lised  for  an  entry,  insert  the  following:  "Sales  Rebates  &  Allow- 
ances Dr."  and  "Accounts  Receivable  Cr."  Opposite  these  terms  and  on  the  blue  line  with 
them,  record,  in  black  ink,  in  the  second  amount  colunm  the  total  (for  the  month)  of 
the  rebates  and  allowances  to  customers.    Rule  this  book  as  you  ruled  the  purchases  book. 

8.  Post  from  all  books  of  original  entry,  and  take  a  trial  balance  of  the  general  ledger. 
In  posting  the  special  columns  follow  instructions  previously  given,  remember  also  that 
the  total  of  the  general  expense  column  should  be  posted  instead  of  the  individual  items  in 
this  column.  Instructions  for  posting  the  totals  of  the  sales  rebates  and  allowances  book 
and  the  purchases  rebates  and  allowances  book  were  given  on  page  186. 

9.  Compare  the  balance  of  the  Notes  Receivable  account  with  the  notes  on  hand  as 
shown  by  the  notes  receivable  book. 

10.  Prepare  a  statement  of  account  for  each  customer  whose  account  shows  a  balance. 
Study  the  illustration,  given  in  this  book,  of  a  statement  of  account. 

11.  Prepare  a  Trading  and  Profit  and  Loss  Statement.  Follow  the  form,  which  has 
been  used  for  this  kind  of  statement  in  other  sets.  There  are,  however,  the  two  following 
exceptions  to  that  form : 

First,  treat  Freight  Cartage-Out  as  a  selling  expense  by  including  the  amount  of 
this  account  in  the  sellhig  expense  group  of  accounts.  The  only  reason  for  doing  this  is, 
as  has  been  previously  explained,  freight-out  may  be  regarded  either  as  a  selling  expense 
or  as  a  deduction  from  gross  sales. 

Second,  analyze  the  General  Expense  account  and  determine  the  amount  chargeable 
to  each  of  the  following  sub-accounts:  Rent,  Ofl&ce  Salaries,  Ofl&ce  Supplies,  Depreciation, 
Postage,  Collection  &  Exchange. 

12.  Prepare  a  Balance  Sheet. 

In  the  preparation  of  this  Balance  Sheet  there  will  be  three  classes  of  assets  as  follows : 
current,  permanent,  and  deferred  charges.  There  will  also  be  an  accrument  of  interest, 
which  may  be  included  among  the  current  assets.  There  will  be  only  one  class  of  liabilities, 
— current;  the  accrued  wages  of  the  employees  should  be  included  among  the  items  which 
compose  this  class  of  liabilities. 

However,  a  new  and  interesting  situation  arises  from  the  accounts  payable  ledger. 
The  account  with  Biloxi  Canning  Co.  and  the  account  with  The  American  Sugar  Refining 
Co.  show  debit  balances.  These  results  are  due  to  the  adjustments,  which  were  made  in 
these  accounts,  after  they  had  been  paid  in  full.  Therefore,  these  accounts  are,  at  the 
present  time,  really  accounts  receivable  instead  of  being  accounts  payable;  and,  for  this 
reason,  the  total  of  these  accounts  should  be  included  among  the  accounts  receivable, 
under  the  heading  of  "Rebates  due  from  Creditors." 

Likewise,  the  amount  of  the  creditors'  accounts  to  be  included  in  the  Balance  Sheet 
must  be,  not  the  net  amount  of  the  balances  of  the  accounts  payable  ledger,  but  the  gross 
amount  of  the  credit  balances  of  this  ledger. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    201 

It  will  be  observed  that  the  balance  of  the  Accounts  Payable  account,  therefore,  does 
not  agree  with  the  total  of  customers'  accounts  paj'^able  as  shown  by  the  Balance  Sheet; 
this  difference,  however,  is  caused  by  the  two  accounts  which  have  just  been  discussed 
and  which  show  debit  balances.  It  would  be  manifestly  wrong  to  state  incorrectly  the 
liabilities  of  the  firm.  We  cannot  say  that  the  liabilities  are  less  because  one  or  two  business 
houses,  which  usually  are  creditors,  happen  to  owe  the  firm  on  account,  even  though  such 
accounts  are  in  the  accounts  payable  ledger.  It  would  be  equally  logical  to  cancel  the  entire 
balance  of  accounts  payable  for  no  other  reason,  than  that  the  balance  of  accounts  receivable 
is  the  larger,  in  which  case,  the  accounts  payable  may  be  omitted  from  the  Balance  Sheet, 
and  the  accounts  receivable  stated  as  the  result  of  such  a  cancellation — this,  of  course,  is 
not  reasonable. 

As  an  illustration  of  this  principle,  suppose  A  has  accounts  receivable  which  amount 
to  $1000.00,  and  accounts  payable  which  amount  to  $400.00.  It  would  be  wrong  for  him 
to  say  that  his  accounts  receivable  amount  to  $600.00.  Accounts  receivable  should  never 
be  used  as  a  means  by  which  to  reduce  the  amount  of  the  accounts  payable,  or  vice  versa. 
There  may  be  an  exception  to  this  rule  in  a  case  in  which  accounts  with  a  person,  firm, 
or  corporation  appear  in  both  the  accounts  receivable  ledger  and  the  accounts  payable 
ledger;  but  such  instances  are  rare. 

13.  Prepare  closing  journal  entries  in  the  usual  manner. 

14.  Rule  the  general  ledger  accounts,  which  are  affected  by  the  closing  journal  entries. 
Do  not  forget  to  bring  down  the  balance  of  those  accounts,  which  contained  deferred 
charges. 

15.  Make  the  proper  adjustments  for  the  accrued  accounts. 

16.  Prepare  a  trial  balance  from  the  general  ledger,  to  determine  the  correctness  of 
that  ledger,  before  proceeding  with  the  work  for  the  following  month. 


STORES  LEDGER 

The  use  of  a  stores  ledger  is  not  common  except  in  the  larger  business  houses  in  which 
it  is  necessary  to  account  for  each  article  of  merchandise.  This  necessity  generally  arises 
from  the  fact  that  several  persons  have  access  to  the  stores.  In  such  cases  it  is  difficult 
to  fix  upon  one  person  responsibility  for  the  safekeeping  of  the  stores  unless  a  stores  ledger 
is  in  use. 

In  a  smaller  business  the  owner  or  manager  comes  more  directly  into  contact  with  the 
handling  of  the  merchandise  and,  therefore,  may  observe  any  unusual  procedure  in  this 
department. 

However,  a  growing  business  must  solve  the  problem  of  whether  its  probable  losses 
from  peculations  and  carelessness  are  more  or  less  than  the  cost  of  maintaining  a  stores 
ledger  would  be,  since  the  keeping  of  such  a  book  usually  involves  considerable  expense. 
This  problem  is  not  always  easily  solved. 

The  principles  which  govern  the  use  and  operation  of  a  stores  ledger  are  not  difficult. 
A  slight  knowledge  of  bookkeeping  is  all  that  is  necessary  since  in  many  stores  ledgers, 
quantities  only  are  recorded.  The  headings  of  the  various  columns  are  usually  self- 
explanatory. 

In  this  set,  the  use  of  a  stores  ledger  is  optional  with  the  teacher  and  student. 


202 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


HOW  TO  USE  THE  STORES  LEDGER 

The  number  and  names  of  the  departments  into  which  a  business  is  divided  depend 
upon  many  things,  but  one  of  the  main  things  is  the  size  of  the  business.  However,  the 
number  of  departments  into  which  a  business  might  be  divided  would  not  affect  the  use  of 
a  stores  ledger. 

The  business  of  the  Western  Grocery  House  is  handled  by  eight  departments.  The 
number  and  name  of  each  department  and  the  articles  handled  by  each  department  are 
shown  by  the  following  schedule : 


SCHEDULE   OF   DEPARTMENTS 


No. 

Name 

Articles  Handled  by  Each  Department 

1 

Fancy  Groceries 

Apples,  Peaches,  Prunes  60/70,  Prunes  70/80. 

2 

Sundries 

Matches;  Soap,  Chicago  Family;  Soap,  Fairy  White;  Soap,  Glycerine  Tar; 
Soap,  Old  Brown;  Soap,  Santa  Claus. 

3 

Sugar 

Barrels,  Granulated;  Sacks,  Granulated. 

4 

Coffee  and  Tea. 

Coffee,  0.  G.  Java;  Coffee,  Fancy  Santos;  Coffee,  Select  Golden  Rio. 

5 

Canned  Goods 

Beans,  2#  P.  L.  String;  Corn,  2#  Old  Abe;  Peas,  2#  Menu;  Pumpkins,  2# 
Menu;  Salmon,  Col.  River;  Shrimp,  1#  Dried;  Shrimp,  1  gal.  Headless; 
Shrimp,  2  gal.  Headless;  Shrimp,  1#  Pickled;  Shrimp,  2#  Pickled; 
Succotash,  2#  Old  Abe;  Tomatoes,  2#  Pewaukee  Lake;  Tomatoes,  3# 
Pewaukee  Lake. 

6 

Flour  and  Cereals 

Flour,  34  sacks  Ceresota;  Flour,  K  sacks  P.  B.;  Flour,  bbl.  P.  B. 

7 

Cheese,  Fish  and  Salt 

Salt,  Mich,  bbl;  Salt,  Mich.  Kegs;  Salt,  Mich.  3's;  Salt,  Mich.  5's. 

8 

Cigars  and  Tobacco 

No  purchases  or  sales  during  January. 

Proceed  as  follows  to  open  the  proper  accounts : 

1.  Rule  sheets  of  paper  to  correspond  with  the  illustration  of  a  stores  ledger,  page  150. 
These  sheets  should  be  approximately  83^  in.  by  11  in.,  or  about  the  size  of  ordinary  ''type- 
writing" paper.  First,  write  the  name  or  the  number  of  a  department  at  the  top  of  the 
page;  then,  underneath  the  name  of  the  department  open  an  account  for  each  article 
handled  by  that  department.  The  names  of  the  articles,  in  alphabetical  order,  are  shown 
by  the  Schedule  of  Departments. 

If  you  use  sheets  of  paper  of  the  size  that  has  been  suggested,  you  can  place  from  four 
to  six  accounts  on  each  page. 

After  accounts  have  been  opened  for  all  the  articles  in,  say,  the  Fancy  Groceries 
Department,  proceed  in  a  similar  manner  with  Sundries  Department,  etc.  However,  it 
is  not  necessary  to  open  any  accounts  for  Department  No.  8  as  there  are  no  purchases  or 
sales  in  this  department  during  January. 

2.  Arrange,  according  to  dates,  all  the  invoices  for  purchases  of  merchandise;  then 
enter  in  the  proper  column  each  item  which  appears  on  these  invoices.  The  column 
which  is  headed  "Price"  refers  to  the  cost  price  of  the  article  as  shown  by  the  invoice. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    203 

Some  business  houses  do  not  record  in  the  stores  ledger  the  cost  prices  of  the  goods  pur- 
chased. In  such  cases  the  stores  ledger  becomes  a  record  of  quantities  only,  and  that  is 
the  real  function  of  this  book. 

3.  When  you  have  entered  all  the  items  from  the  invoices,  proceed  in  a  similar  manner 
with  the  orders.  Turn  to  order  No.  1;  the  first  item  is  "16  doz.  Menu  Peas,"  which  is 
entered  (on  the  proper  line)  by  writing  the  date  of  the  bill  for  this  order,  the  order  number, 
and  the  quantity  sold, — do  not  use  the  selling  price.  Proceed  in  a  similar  manner  with 
the  other  items  on  this  order;  then  with  order  No.  2,  etc.,  until  all  the  items  on  all  the 
order  blanks  have  been  entered. 

The  unit  of  measure,  weight,  or  quantity  for  each  commodity  should  be  the  same 
for  both  purchases  and  sales.  For  example:  the  quantity  of  an  article  purchased  should 
not  be  expressed  as  "cases"  and  the  quantity  sold  expressed  as  "dozen,"  but  both  purchases 
and  sales  should  be  expressed  in  the  same  denomination.  It  would  perhaps  be  better 
to  use  the  units  which  are  used  for  the  distribution  of  freight  charges. 

HOW  TO  OBTAIN  THE  INVENTORY 

When  this  work  is  completed,  the  quantity  on  hand,  if  any,  is  shown  by  extending 
the  difference  between  the  quantity  received  and  the  quantity  sold  into  the  column  headed 
"Balance  on  Hand." 

It  is  a  common  practice  to  add  to  the  cost  value  of  the  goods  the  freight  charges 
which  have  been  incurred  in  obtaining  them.  Therefore,  the  following  table  of  freight 
charges  is  given  for  your  use  in  determining  the  value  of  the  inventory.  The  amount 
of  the  freight  charge  for  each  unit  of  goods  should  be  added  to  the  invoice  cost  of  each 
unit  of  goods;  the  result  is  the  cost  per  unit  (freight  paid)  of  the  goods. 

This  cost  per  unit,  which  is  written  in  the  column  headed  "Price,"  is  then  used  as 
the  number  by  which  to  multiply  the  quantity  of  each  article  on  hand.  The  products 
of  these  multiplications  will  be  the  cost  (freight  paid)  of  the  goods  on  hand ;  these  amounts 
are  then  placed  in  the  column  headed  "Value."  The  total  of  all  these  amounts  is  the 
value  (freight  paid)  of  the  inventory  of  merchandise. 

However,  in  order  to  ascertain  the  proper  value  of  the  sugar  on  hand,  10%  of  the 
amount  which  is  now  shown  by  the  "Value"  column  must  be  deducted.  This  is  to  allow 
for  the  rebate  which  was  given  on  the  purchases  of  sugar  during  January.  The  rebate 
allowed  on  the  1  gal.  cans  of  headless  shrimp  must  be  treated  in  a  similar  manner. 

The  information  obtainable  from  a  stores  ledger  is  sometimes  valuable  in  matters 
not  concerned  with  internal  or  departmental  accounting.  If  the  stores  accounts  are 
properly  kept  and  the  books  properly  protected,  they  are  excellent  aids  in  estabUshing 
the  value  of  goods  destroyed  by  fire  or  lost  by  burglary. 

The  inventory  now  shows  the  invoice  cost  of  the  goods  on  hand,  and  it  has  also  absorbed 
its  proportion  of  the  freight  charges.  Therefore,  the  remainder  of  the  freight  charges  must 
be  absorbed  by  the  goods  sold.  The  manner  in  which  this  is  done  will  be  explained  in 
connection  with  the  work  of  the  cost  clerk. 

DEPARTMENTAL  ACCOUNTING 

In  a  large  business  in  which  departments  are  maintained,  each  department  may 
sometimes  be  in  charge  of  one  person  who  may  share  in  the  profits  of  that  department. 
He  is  known  as  the  head  of  the  department  and  he  usually  buys  all  goods  for  his  department. 
Naturally  he  is  interested  in  knowing  the  profits  produced  by  his  department  because  his 
own  salary  is  affected  thereby. 


204 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


The  management  of  the  business  may  also  wish  to  know  whether  or  not  a  department 
is  being  maintained  at  a  loss.  If  a  department  should  happen  to  show  a  loss,  it  is  possible 
by  means  of  departmental  or  internal  accounting  to  determine  this  fact  and  to  take  proper 
action  to  avoid  such  losses  in  the  future.  The  remedy,  however,  may  not  be  determined 
by  accounting,  since  that  is  a  question  of  management. 

To  be  able  to  show  the  profits  for  each  department,  you  must  ascertain,  first,  what 
the  sales  for  each  department  are;  and,  second,  what  the  cost  of  the  sales  for  each  depart- 
ment is.  This  cost  should  include  the  proper  amount  of  the  freight  charges  for  each 
department.     The  difference  between  the  cost  of  sales  and  the  sales  is  the  gross  profit. 

FREIGHT    CHARGES 

To  be  added  to  invoice  prices  in  figuring  costs  for  inventories  and  for  use  of  the  profit  clerk. 
No  freight  charges  are  added  in  figuring  costs  on  articles  bought  freight  prepaid. 


^\rticles 

Cents 

Per 

fBeans,  2#  Pewaukee  Tiake  String 

1  69/100 

doz.  cans 

Cheese,  Swiss 

13    3/5 

100  lbs.  net  weight 

"         Young  American 

13    9/10 

U           tl                               u 

Cigars,  Cremo  and  Francis  Wilson 

21  12/100 

M 

*CofTee 

45/100 

lb.  net  weight 

tCorn,  2#  Old  Abe. 

1  69/100 

doz.  cans 

«     2#    "      « 

3  15/100 

u           u 

Olive  Oil 

28 

■  case 

Oysters,  1#  Cove 

12  15/100 

u 

tPeas,  2#  Menu 

1  69/100 

doz.  cans 

fPumpkins,  2#  Menu 

1  69/100 

a           u 

Sardines,  Messir  }4's 

33    3/5 

case 

Shrimp,  1#  Dried 

8  55/100 

u 

"         1  gal.  Headless 

26  77/100 

u 

2  gal. 

38     1/4 

u 

1#  Pickled 

12  15/100 

u 

2# 

22  27/100 

u 

tSuccotash,  2#  Old  Abe 

1  69/100 

doz.  cans 

fTomatoes,  2#  Pewaukee  Lake 

1  69/100 

u           u 

2# 

3  15/100 

u           u 

t         "          3            " 

2  47/100 

u          u 

*0n  shipment  of  Jan.  2  only.     Shipment  of  Feb.  6  received  freight  paid;  see  explanation,  when  bill 
is  received  Feb.  13. 

fReceived  in  carload  lots.     AH  other  articles  are  received  in  less  than  carload  lots. 

WORK  OF  COST  AND  PROFIT  CLERKS 

On  the  left-hand  side  of  the  order  blank  are  two  columns  which  are  to  be  used  for 
showing  the  cost  of  the  goods  sold  on  each  order.  The  general  heading  of  these  two  columns 
is  "Cost." 

One  of  the  columns  is  headed  "Price,"  and  the  other  "Amount."  These  columns  are 
for  use  in  determining  the  cost  of  the  goods  which  were  shipped  or  dehvered  on  each  order. 
In  order  to  estimate  the  cost  of  these  goods,  it  is  necessary  to  know  the  cost  of  each  unit 
of  the  goods  sold.  This  cost  is  the  cost  of  the  unit  when  it  is  delivered  at  the  store  (freight 
paid). 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    205 

In  the  column  which  is  headed  "Price"  you  will  enter  the  cost  of  the  goods.  This 
price  is  the  invoice  price  of  each  unit  plus  the  freight  charges  for  the  unit.  Thus,  in  order 
No.  1,  the  first  item  is  16  doz.  Menu  Peas.  The  invoice  cost  of  these  peas  is  823^c  per 
doz.  and  the  freight  charge  is  1  69-lOOc  per  doz.  Therefore,  the  cost  (freight  paid)  is 
$.8419  per  doz.  and  this  is  the  number  to  be  placed  in  this  column. 

Now  multiply  16  x  $.8419,  and  place  the  result  in  the  column  headed  "Amount." 
Proceed  in  a  similar  manner  with  each  item  on  this  order. 

You  will  now  distribute  these  costs  in  the  column  which  is  headed  "Cost,"  and  which 
is  just  above  the  other  cost  column.  This  distribution  is  made  according  to  departments, 
and  when  completed  the  total  of  this  column  must,  of  course,  be  exactly  the  same  as  the 
total  of  the  lower  amount  column. 

In  the  column  headed  "Sales"  you  will  enter,  by  departments,  the  amounts  in  the 
30  days  and  60  days  columns,  which  are  on  the  right-hand  side  of  the  order  blank.  The 
total  amount  of  the  sales  column  must,  of  course,  equal  the  total  of  the  two  columns  from 
which  the  amounts  were  taken.  Proceed  in  a  similar  manner  with  order  No.  2  and  likewise 
with  all  other  orders. 

Note  that  sardines,  although  they  are  marketed  in  cans,  are  not  handled  by  the  Canned 

Goods  Department,  but  by  the  Fancy  Groceries  Department.     In  calculating  the  cost  of 

order  No.  24,  remember  that  of  the  8  boxes  of  matches  sold,  7  were  bought  at  $1.15,  and 

one  at  $1,123^. 

TO  OBTAIN  TOTAL  COST  OF  GOODS  SOLD 

Now  turn  to  the  department  costs  register  (Blank  Book  No.  V)  and  enter  in  this  book 
in  the  proper  department  columns  the  amounts  in  the  upper  cost  columns  of  the  order 
blanks.  Total  all  columns;  be  sure  that  the  sum  of  all  the  department  columns  equals 
the  sum  of  the  total  column,  which  is  the  last  column  of  this  book. 

You  now  have,  by  departments,  the  cost  of  the  goods  sold,  except  the  cost  of  the  goods 
sold  by  the  Sugar  and  Canned  Goods  departments.  A  rebate  of  10%  was  allowed  on  the 
sugar  purchased  and  a  rebate  of  10c  per  can  on  the  1  gal.  cans  of  headless  shrimp.  Since 
the  cost  of  the  sugar  was  10%  less  than  the  amount  shown  by  the  sugar  column,  you  may 
now  enter,  in  red  ink,  in  this  column,  an  amount  equal  to  10%  of  the  price  of  the  sugar 
sold.  Ascertain  also  the  number  of  cans  of  1  gal.  headless  shrimp  which  were  sold,  and 
enter,  in  red  ink,  in  the  canned  goods  column  the  amount  of  this  allowance  at  10c  per  can. 
Extend  the  total  of  these  deductions  to  the  right  into  the  total  column,  in  red  ink.  Then 
subtract,  again,  all  these  amounts,  total  the  columns  and  rule  them  properly. 

TO  OBTAIN  TOTAL  SALES,  BY  DEPARTMENTS 

Next  enter  in  the  proper  columns  of  the  department  sales  register  the  amounts  which 
are  in  the  sales  columns  at  the  top  of  the  order  blanks.  Total  all  the  columns  and  enter, 
in  red  ink,  in  the  canned  goods  column  and  also  in  the  total  column  the  amount  of  the 
rebates  which  were  allowed  customers  during  the  month.  Total  the  columns  again  and 
rule  them  properly.  The  amount  now  shown  in  the  total  column  must,  of  course,  agree 
with  the  balance  of  the  Sales  account  in  the  general  ledger,  before  this  account  is  closed. 

TO  OBTAIN  PROFITS  BY  DEPARTMENTS 

Now,  enter  upon  the  first  line  of  the  department  profits  register  the  totals  of  the 
department  sales  register;  then,  enter  upon  the  second  line  of  this  same  register,  the  totals 
of  the  department  costs  register.     Subtract,  the  latter  amounts  from  the  former,  and 


206  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

enter  the  differences  on  the  next  line  below.  These  differences  are  the  gross  profits  of  the 
departments.  Rule  this  book  properly.  In  the  order  number  column  make  the  proper 
explanation,  by  writing  on  the  proper  lines  the  following:  "Sales,"  "Cost  of  Goods  Sold," 
"Profit." 

The  results  which  are  obtained  by  this  book  and  which  relate  to  the  cost  of  the  goods 
sold  may  be  verified  by  referring  to  the  Trading  Statement,  which  shows  a  slightly  different 
result.  But,  the  variation  is  caused  by  the  following  two  items:  first,  the  discount  on 
purchases,  which  did  not  enter  into  the  calculations  for  the  cost  of  goods  sold  in  the  depart- 
ments, but  which  does  appear  on  the  Trading  Statement  as  a  deduction  from  purchases. 
Second,  after  the  discount  on  purchases  has  been  deducted  from  the  department  costs, 
there  still  remains  a  discrepancy  of  82c,  which  is  due  to  differences  in  fractional  prices  and 
variations  of  weights. 

This  difference  will  also  occur  in  the  verification  of  the  inventory,  and  the  cause  of 
it  will  be  made  clear  as  the  inventories  of  the  various  departments  in  which  the  differences 
occur  are  verified. 

It  will  be  observed  that  there  is  also  a  difference  between  the  net  sales  as  shown  by 
the  Trading  Statement  and  by  the  department  profits  register.  This  difference  is  caused 
by  the  discount  on  sales,  which  is  deducted  from  the  sales  on  the  Trading  Statement,  but 
which  is  not  considered  in  the  department  profits  register. 


PROOF  OF  INVENTORY  BY  ACCOUNTING 

The  inventory,  which  was  taken  from  the  stores  ledger,  may  be  verified  now  by 
accounting. 

Enter  in  the  department  purchases  register  the  amount  of  each  invoice  for  goods 
purchased.  Place  the  amount  of  each  purchase  in  the  proper  column,  according  to  depart- 
ments, and  enter,  also,  in  these  columns  the  amounts  of  freight  paid,  if  any,  on  such  pur- 
chases, using  one  line  for  both  amounts.  Total  each  column  of  this  book.  Be  sure  that 
the  total  of  the  total  column  is  equal  to  the  total  of  all  the  department  columns.  This 
amount  is  equal  to  the  total  purchases  as  shown  by  the  Purchases  account  of  the  general 
ledger  plus  the  total  of  the  Freight-In  account.  It  is  also  equal  to  the  total  purchases  as 
shown  by  the  Trading  Statement. 

Certain  rebates  were  allowed  during  January  to  the  firm.  10%  of  the  total  of  the 
sugar  column  should  be  subtracted  from  that  total;  and  $36.00  should  be  subtracted  from 
the  total  of  the  canned  goods  column,  after  these  amounts  are  entered  in  their  respective 
columns  and  their  total  extended  into  the  total  column.  The  amount  of  each  column 
should  then  be  brought  down  on  the  next  line.  The  totals  of  these  columns  should  now 
prove  in  the  same  manner  that  they  did  before  the  deductions  for  rebates  were  made. 

Moreover,  the  footing  of  the  total  column  is  equal  to  the  total  purchases  (Purchases 
account  plus  Freight-In  account)  minus  the  amount  of  the  Purchases  Rebates  and  Allow- 
ances account;  it  is  also  equal  to  the  total  purchases  (as  shown  by  the  Trading  Statement) 
minus  the  purchases  rebates  and  allowances  as  shown  by  the  same  statement. 

On  the  15th  line  of  the  department  profits  register,  draw  two  heavy,  black  lines 
across  the  page.  Then,  in  the  order  number  column  on  the  next  blue  line,  write  "Purchases ;" 
and  on  this  same  line  write  the  net  amount  of  purchases  for  each  department.  The  amounts 
should  be  obtained  from  the  department  purchases  register. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    207 

On  the  next  blue  line  in  the  order  number  column,  write  "Cost  of  Goods  Sold;"  and, 
on  the  same  line  in  the  proper  columns,  write  the  net  cost  of  goods  sold  in  each  department. 
These  amounts  should  be  obtained  from  the  department  costs  of  goods  sold  book. 

Then  deduct  the  costs  of  the  goods  sold  from  the  costs  of  the  goods  purchased,  and 
the  differences  will  be  the  costs  of  goods  on  hand,  or  the  inventories  of  merchandise  by- 
departments.  These  remainders  should  be  written  on  the  next  blue  line  and  the  book 
properly  ruled. 

The  amounts  here  obtained  should  agree  with  the  amounts  of  the  inventory,  which  was 
taken  from  the  stores  ledger.  However,  there  are  certain  minor  discrepancies  due  mostly 
to  variations  on  account  of  fractions  or  variations  in  weights.  These  differences  are  as 
follows:  Ic  in  the  Sundries  Department,  78c  in  the  Coffee  and  Tea  Department,  and  3c 
in  the  Canned  Goods  Department.  Below  the  reconciliation  of  these  inventories,  bring 
down  the  amounts  of  the  inventories,  by  stock,  preparatory  for  the  work  of  the  next  month. 

One  always  discovers  differences  of  this  kind  in  attempting  to  verify  inventories.  But 
if  all  the  departments  are  being  managed  properly,  the  discrepancies  should  not  be  large. 
Futhermore,  if  the  discrepancy  in  the  inventory  of  a  department  is  too  large,  an  investiga- 
tion of  that  department  will  usually  lead  to  the  discovery  of  the  causes.  Then  the  proper 
remedies  may  be  appUed. 

PETTY   CASH  BOOK 

The  petty  cash  book  is  a  device  by  means  of  which  a  great  many  entries  for  small 
amounts  that  have  been  paid  in  currency  are  excluded  from  the  general  cash  book;  by  this 
device  the  latter  book  is  reserved  for  the  purpose  of  recording  payments  by  checks  only. 

It  is  advisable  to  make  all  payments  by  checks  whenever  it  is  possible  to  do  so,  as  a 
cancelled  check  is  almost  indisputable  evidence  that  the  amount  for  which  it  is  made  payable 
has  been  paid.  However,  there  are  many  small  items  that  must  be  met  from  day  to  day, 
and  to  pay  them  by  checks  would  be  inconvenient  to  both  parties.  Therefore,  it  is  a  general 
practice  to  establish  a  petty  cash  fund  from  which  these  small  items  may  be  paid,  and, 
whenever  it  becomes  necessary,  to  replenish  this  fund  by  paying  into  it  a  sum  of  money 
equal  to  the  amount  that  has  been  expended. 

By  this  plan  the  petty  cash  fund,  or  imprest  fund,  is  always  maintained  on  the  general 
ledger  at  a  uniform  amount.  It  may  become  necessary,  at  times,  either  to  increase  or  to 
decrease  this  fund.  However,  the  fund  should  be  established  for  such  an  amount  that  its 
replenishment  every  few  days  will  not  be  necessary,  nor  should  a  change  in  the  amount 
of  the  established  fund  be  necessary.  But  it  is  not  always  possible  to  determine  in  advance 
the  amount  of  money  needed  for  this  fund. 

In  a  large  business  it  is  not  unusual  to  find  a  very  elaborately  arranged  petty  cash 
book.  The  credit  side  of  it  may  contain  many  special  columns  for  the  classification  of  the 
expenditures;  in  fact,  it  may  resemble  the  credit  side  of  the  general  cash  book,  or  check 
register.  But  in  a  small  business  a  simpler  form  of  book  will  answer  every  purpose;  there- 
fore, it  is  a  common  practice  to  use  a  small  book  about  the  size  of  a  bank  book,  or  to  turn 
to  such  use  a  portion  of  a  journal  or  of  some  other  book  of  original  entry. 

The  entries  which  are  made  in  a  petty  cash  book  should  be  in  the  same  form  as  if  they 
were  made  in  the  general  cash  book.  There  is  seldom,  if  ever,  any  need  to  change  the 
form  of  an  entry  for  an  expenditure  just  because  it  is  made  in  a  petty  cash  book. 

The  advantages  in  the  use  of  the  petty  cash  book  are  many,  but  the  principal  ones 
may  be  stated  as  follows :    (1)  it  prevents  the  pages  of  the  general  cash  book  from  being 


208  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

encumbered  with  a  great  many  small  charges  which  may  as  well  be  disposed  of  by  one  charge 
for  a  larger  amount;  (2)  it  is  not  necessary  to  balance  the  general  cash  book  each  day,  as 
its  balance  must  be  in  accord  with  the  bank  balance  or  balances. 

The  petty  cash  book  should  be  balanced  and  ruled  each  day  at  the  close  of  business, 
and  the  cash  on  hand  should  be  counted  in  order  to  verify  the  balance  of  the  petty  cash 
book.  The  charges  which  are  made  in  this  book  are  distributed  by  means  of  a  journal 
entry  to  their  proper  accounts. 

MEMORANDA   OF  TRANSACTIONS   FOR  FEBRUARY 

Feb.    1.  It  has  been  decided  to  establish  a  petty  cash  fund  by  transferring  to  this  fund 
the  amount  of  currency  on  hand  Jan.  31.     Make  the  proper  entry  for  the  transfer. 

The  entry  to  create  a  petty  cash  fund  may  be  made  as  follows:  On  the  credit  side  of  the  general  cash 
book  write  "Petty  Cash  Fund"  and  extend  into  the  general  column  of  the  cash  book  the  amount  of  the 
fund.    Then,  in  the  general  ledger  open  an  account  under  the  same  name. 

For  a  petty  cash  book,  use  the  last  four  pages  of  your  bank  book.  On  the  debit  side  of  the  petty 
cash  book  write,  "Feb.  1,  Cash  received  $12.45."  Whenever  a  petty  item  is  paid  make  an  entry  for  it 
on  the  credit  side  of  the  book,  just  as  you  would  if  the  entty  were  made  in  tlie  general  cash  book. 

No  Outgoing  Papers  used  for  this  month. 
Feb.    1.  In  order  to  meet  all  obligations  promptly,  the  partners  have  decided  to  discount 

the  Blair  note.    The  bank  has  agreed  to  discount  it  at  6%.     Make  the  proper 

entries. 

Follow  the  instructions  that  were  given  when  the  Erskine  note  was  discounted  on  the  12th  ult. 

Feb.    1.  Pay,  by  check,  the  invoice  of  Jan.  12  of  the  International  Salt  Co. 
1.  Pay,  by  check,  the  bill  of  the  3d  ult.  of  The  A.  H.  Andrews  Co. 
1.  The  stock  and  fixtures  have  been  insured;  receive  and  pay,  by  check,  the  bill  of 
Geo.  S.  Haskell  for  the  premium. 

Take  the  insurance  policy  from  your  outfit  and  read  it  carefully.  When  you  understand  it  thoroughly, 
file  it  in  the  outgoing  papers  envelope.  Next  detach  bill  No.  22  from  your  pad,  have  it  receipted  by  the 
teacher,  and  then  file  it.  Draw  the  check  in  favor  of  Geo.  S.  Haskell,  the  agent,  who  will  settle  with  the 
insurance  company  for  the  premiima  paid. 

Feb.    1.  Draw  a  check  for  $50.00  in  favor  of  Ray  E.  Parker,  and  another  check  for  $60.00 
in  favor  of  Herbert  Templeton. 

These  amounts  are  drawn  against  their  salaries;  therefore,  charge  these  to  their  personal  accounts. 

Feb.    1.  Pay,  by  check,  the  rent  for  February. 

1.  Receive  invoice  of  oysters  from  the  Biloxi  Canning  Co.  (No.  23). 

The  bill  is  dated  January  25th.     It  is  to  be  entered  and  posted  as  of  that  date. 

Feb.    1.  Receive  an  expense  bill  from  the  Chicago  &  Eastern  Illinois  Railway  Company 
for  freight  on  the  shipment  of  oysters.     Pay  the  bill  (No.  4)  by  check. 

2.  Receive  orders  No.  30  and  No.  31 ;  both  were  sent  in  by  mail  and  have  been  copied, 
on  regular  order  blanks. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    209 

Feb.    2.  Receive  bank  draft  (No.  19)  from  Hamlin  &  Walker  for  the  30-day  bill  of  January 

23,  less  discount. 

3.  The  goods  for  orders  No.  30  and  No.  31  have  been  shipped. 

3.  Receive  order  No.  32,  sent  in  by  Mr.  Kennedy. 

3.  Three  boxes  of  Santa  Claus  soap,  purchased  of  the  N.  K.  Fairbank  Company 

on  the  27th  ult.,  have  been  found  to  be  defective.     This  soap  has  been  returned 

to  them  for  credit. 

The  N.  K.  Fairbank  Company  will  issue  a  credit  memorandum  on  receipt  of  the  goods;  but,  instiead  of 
waiting  for  this,  make  out  a  bill  as  if  these  goods  had  been  sold  to  the  Fairbank  Company.  It  is  the  custom 
with  many  concerns  to  "bill  back"  goods  that  have  been  returned.  This  is,  of  coiu^e,  not  a  sale,  and  should 
not  be  treated  as  such;  instead,  it  is  to  be  entered  in  the  purchases  rebates  and  allowances  book  in  the 
usual  manner. 

Feb.    3.  Receive  check  (No.  20)  from  J.  H.  Walters  &  Bro.  in  settlement  of  bills  of  January 

24,  less  discount. 

3.  Pay  $5.00  in  currency  for  postage  stamps.    Make  the  proper  entry  in  the  petty 

cash  book. 
3.  Pay,  by  check,  the  bill  of  the  Remington  Typewriter  Company  of  January  3. 
3.  Pay,  by  check,  the  invoice  of  the  Biloxi  Canning  Co.  of  the  25th  ult.,  less  rebate 

on  January  18  and  less  discount. 

The  rebate  on  the  headless  shrimp  was  10c  per  can;  this  reduced  the  price  per  can  to  40c.  When 
the  invoice  of  the  Biloxi  Canning  Co.  was  paid  on  Jan.  13,  our  firm,  however,  took  discount  on  the  original 
price  of  50c.  This  was  proper  at  the  time  the  invoice  was  paid,  but  it  is  now  (since  a  rebate  was  allowed), 
wrong  in  amount,  to  the  extent  of  the  discount  on  the  allowance.  Therefore,  the  amount  of  the  rebate  is 
to  be  deducted  from  the  invoice  to  be  paid  now;  then,  discount  should  be  taken  on  the  difference. 

Feb.   4.  Receive  two  invoices  from  The  American  Tobacco  Company  (No.  24  and  No.  25). 

The  goods  for  bill  No.  24  are  sold,  "F.  O.  B.  New  York,"  while  the  goods  for  bill  No.  25  are  sold 
"Freight  Paid."  The  two  lots  were  shipp)ed  together  and  the  freight,  properly  proportioned  to  the  goods 
sold  f.  o.  b.  New  York,  is  charged  on  the  bill.  This  freight  is  to  be  charged  to  Freight-In  account,  therefore 
only  the  amount  of  the  merchandise  is  entered  in  the  purchases  book.  An  entry  for  the  freight  should  be 
made  in  the  journal. 

Feb.  4.  The  bank  balance  is  low,  and  some  large  bills  will  mature  soon.  Mr.  Templeton 
and  Mr.  Parker  have  conferred  regarding  what  is  best  to  do.  The  credit  of  the 
firm  must  be  maintained.  It  has  done  a  good  business  thus  far  and  has  excellent 
prospects  for  the  future.  Everything,  however,  depends  on  keeping  its  credit 
good  and  on  being  able  to  discount  its  bills.  It  is  possible  that  the  volume  of 
business  being  done  is  too  large  for  the  amount  of  the  capital. 

Mr.  Templeton  states  that  he  has  no  cash  which  he  may  add  to  his  invest- 
ment. Mr.  Parker  offers  to  invest  $1000.00  more,  and  Mr.  Templeton  is  willing 
that  he  should.  But  even  this  additional  capital  will  still  leave  the  firm  unable 
to  meet  all  its  bills.  Of  the  accounts  receivable,  only  one  30-day  bill,  which  is 
for  a  small  amount,  will  mature  within  the  next  few  days;  and,  consequently, 
the  firm  cannot  depend  on  the  payment  of  accounts  receivable  as  a  source  from 
which  to  obtain  the  necessary  cash. 

Receive  Mr.  Parker's  check  (No.  21)  and  make  the  proper  entry  for  it. 


210  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Feb.  4.  Mr.  Templeton  has  asked  the  bank  for  a  loan  of  $1500.00;  and  the  bank  has 
requested  him  to  furnish  it  with  a  Balance  Sheet  of  the  firm. 

Take  the  bank  statement  from  the  incoming  papers  envelope.  Read  and  study  it  carefully.  Prepare 
the  report  for  the  bank.  It  would  perhaps  be  better  to  prepare  it  first  on  a  sheet  of  paper,  taking  the 
necessary  amounts  from  the  Balance  Sheet  which  you  made  on  January  31.  Have  the  report  apps-oved 
by  your  teacher.  Then  copy  it  on  the  bank  form;  date  this  form  February  1;  sign  it  properly,  but  use 
Feb.  4  as  the  date  on  which  the  report  is  signed.  Deliver  the  report  to  the  bank  by  filing  it  in  the  bank 
pocket  of  the  pocket  file. 

Feb.  4.  The  statement  is  satisfactory  to  the  bank,  and  it  offers  to  lend  the  fi^-m,  for  30  days, 
at  5%  interest,  the  necessary  amount. 

Now,  take  from  your  outfit  a  promissory  note  blank ;  fill  it  out  properly;  and  sign  it  in  the  same  manner 
as  you  sign  the  checks.  Deliver  it  by  filing  it  in  the  bank  pocket.  It  is  customary  with  banks  to  take 
in  advance,  interest  on  notes.  Compute  the  interest,  and  have  your  teacher  enter  the  proceeds  of  the  note 
in  your  pass  book.    Enter  the  amount  also  in  your  check  book  as  "Loan." 

Make  the  proper  entries  for  the  loan  and  the  interest. 

Feb.    4.  Deposit  all  checks  on  hand. 

4.  Although  the  shipment  of  tobaccos  and  cigars  has  not  arrived,  the  bills  for  it 
must  be  paid  in  due  time  in  order  to  save  the  discount.  Pay  them  today,  by 
check. 

The  check  will  arrive  in  New  York  on  Monday,  Feb.  6.  This  is  apparently  a  day  late,  but  it  is  not  as 
the  6th  is  Simday.    Include,  in  your  check,  1/10  of  1%  for  exchange. 

Feb.   4.  Receive  order  No.  33. 

4.  The  goods  for  order  No.  32  have  been  shipped. 

4.  Receive  an  invoice  of  cheese  from  the  Sheboygan  Cheese  Co.  (No.  26). 

4.  Receive  an  expense  bill  from  the  Goodrich  Transportation  Co.  for  freight  on  the 

shipment  of  cheese.    Pay  it  by  check  (No.  5). 
4.  Pay  the  salaries. 
4.  Mr.  Kennedy  reports  his  expenses  for  the  week,  January  31  to  February  4,  as 

$19.26. 
4.  Pay,  by  check,  the  bill  of  The  Diamond  Match  Co.  of  the  25th  ult. 

This  bill  is  due  today;  and  if  the  check  is  sent  by  the  office  assistant,  it  will  reach  them  in  time  to 
entitle  us  to  the  discount. 

Feb.  6.  J.  H.  Walters  &  Bro.  return  six  bags  of  Best  O.  G.  Java  Coffee  sold  them  on  the 
18th  ult.  The  weights  of  the  bags  are  as  follows:  134,  133,  1323^,  134,  133, 
132  lbs. 

Make  the  proper  entry  and  send  them  a  credit  memorandum.  Be  sure  to  deduct  the  tare,  which  in 
the  sale  of  coffees  is  always  1%  of  every  full  100  lbs. 

Feb.    6.  The  goods  for  order  No.  33  are  shipped. 

6.  Pay,  by  check,  the  bill  of  The  N.  K.  Fairbank  Company  of  the  27th  ult.,  less 
credit  and  less  discount. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    211 

Feb.   6.  Mr.  Parker  informs  you  that  the  tobaccos  and  cigars  have  arrived  and  that  the 
bills  are  correct  as  to  quantities  and  prices.     He  asks  you  to  0.  K.  the  bills  for  him. 
6.  Receive  orders  No.  34  and  No.  35;  the  latter  has  been  received  by  mail. 

6.  J.  W.  Chaffee  &  Co.,  ask  for  duplicate  bills  for  their  purchases  of  January  16. 
Comply  with  their  request. 

Prepare  these  bills  just  as  you  did  the  original  bills,  but  mark  them  "Duplicate."     Make  no  entry  for 
them  as  they  were  issued  as  an  accommodation  to  the  customer. 

Feb.    6.  Receive  a  Chicago  bank  draft  for  returns  on  the  C.  0.  D.  shipment  of  the  30th 

ult.,  less  15c  collection  fee  (No.  22). 

Enter  the  full  amount  of  the  draft  on  the  debit  side  of  the  cash  book  and  15c  on  the  credit  side  of 
the  caah  book,  charging  General  Expense.     Compare  the  form  of  this  draft  with  that  of  an  ordinary  check. 

Feb.    7.  The  shipping  clerk  returns  order  No.  35. 

7.  Receive  a  bill  from  the  Chicago  Telephone  Company  for  telephone  service  for 
one  quarter  in  advance;  the  instrument  was  installed  Feb.  1  (No.  27).  Pay 
the  bill  by  check. 

7.  Receive  a  check  (No.  23)  from  J.  W.  Bredin  &  Co.  in  settlement  of  invoice  of 

Jan.  28. 
7.  The  goods  for  order  No.  34  have  been  shipped. 

Place  this  order  in  proper  numerical  place  in  the  sales  binder. 

Feb.    7.  Receive  orders  No.  36  and  No.  37,  the  former  sent  in  by  Mr.  Kennedy. 

7.  Mr.  Templeton  informs  you  that  he  has  had  a  conference  with  Mr.  Tamer  con- 
cerning the  latter's  account.  Mr.  Tamer  is  willing  to  give  his  note  with  C.  E. 
Blank,  whom  Mr.  Templeton  knows  to  be  responsible,  as  surety.  The  note  is 
not  to  include  his  last  order.  It  is  to  be  dated  Feb.  10,  payable  in  40  days,  with 
interest  at  5%. 

Draw  the  note  and  submit  it  to  your  teacher  for  signatures,  then  make  the  proper  entries. 

Feb.    8,  The  goods  for  order  No.  37  have  been  shipped. 

8.  Receive  a  bill  from  Rathborne,  Hair  &  Ridgway  Co.  (No.  28)  for  shipping  boxes. 

9.  The  shipping  clerk  returns  order  No.  36. 

9.  Draw  a  check  for  $15.00  in  favor  of  Mr.  Parker  and  charge  it  to  his  personal 

account. 
10.  Receive  orders  No.  38,  No.  39,  and  No.  40. 

Note  that  the  coffee,  which  is  ordered  in  No.  40,  is  to  be  roasted.    The  coffee  cannot  be  shipped  until 
the  roasting  is  done. 

Feb.  10.  Receive  a  check  (No.  24)  from  the  L.  E.  Megan  Grocery  Co.  for  the  bills  of 
Jan.  31. 
10.  Pay,  by  check,  the  bill  of  the  Sheboygan  Cheese  Co.,  of  the  1st  inst. 


212  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Chicago  paper  is  current  in  Sheboygan;  therefore  no  exchange  is  to  be  included  in  the  check. 

Feb.  11.  The  goods  for  orders  No.  38  and  No.  39  have  been  shipped. 

11.  Pay  the  salaries. 

11.  Mr.  Kennedy's  traveling  expenses  for  the  week,  Feb.  6  to  11,  have  been  $17.88. 

11.  Draw  a  check  for  $50.00,  to  be  sent  to  Mr.  Kennedy  for  traveling  expenses. 

11.  Receive  a  check  (No.  25)  from  G.  A.  &  C.  L.  Adkins  in  settlement  of  the  30-day 
bill  of  Jan.  13. 

11.  Deposit  all  checks  on  hand. 

13.  Receive  an  invoice  for  coffee  from  Westfeldt  Bros.  (No.  29).  By  its  terms,  if  we 
desire  to  take  advantage  of  the  cash  discount,  we  must  pay  it  at  once.  Pay  it,  by 
check,  and  include  in  the  amount  of  the  check  l/lO  of  1%  for  exchange. 

Note  that  this  shipment  was  sent  freight  paid.  The  original  order  for  coffee  was  for  50  bags  of  Fancy 
Santos,  but  only  30  bags  were  sent  in  the  shipment  of  Jan.  2.  Therefore  Westfeldt  Bros,  agreed  to  pay 
he  freight  on  the  so-called  "back  order."     This  is  often  done  in  such  cases. 

Feb.  13.  The  goods  for  order  No.  40  have  been  shipped. 

In  roasting,  coffee  shrinks  about  15%.  However,  it  is  to  be  billed  at  the  green  weight,  and  30c  a  bag 
for  the  cost  of  roasting  is  to  be  added. 

Feb.  13.  Receive  order  No.  41,  sent  in  by  Mr.  Kennedy. 

13.  Mr.  Templeton  wishes  to  draw  $25.00.  Write  a  check  for  that  amount  and  charge 
his  personal  account  with  it. 

13.  Receive  a  bank  draft  (No.  26)  from  J.  W.  Chaffee  &  Co.  for  the  bills  of  the  4th 
inst.,  less  discount,  also  for  the  30-day  bill  of  Jan.  16.  The  balance  of  the  pay- 
ment is  to  apply  to  the  60-day  bill  of  Jan.  16. 

When  a  debtor  who  owes  several  bills  remits  and,  in  doing  so,  specifies  that  his  remittance  is  to  be 
applied  on  a  certain  bill  or  bills,  his  instructions  must  be  followed.     Check  out  of  the  account  the  bills  paid. 

In  case  a  remittance  includes  bills  of  different  dates,  it  is  advisable  to  make  separate  entries  for  these 
bills  and  separate  postings,  for  this  will  facilitate  checking  out  the  bills. 

Feb.  15.  Order  No.  41  has  been  filled,  and  the  goods  shipped. 

15.  Receive  order  No.  42,  which  was  sent  in  by  the  traveling  salesman. 

Note  that  this  order  calls  for  a  cereal  which  the  firm  does  not  carry  in  stock.  In  the  trade  this  is 
called  a  "pick-up"  order.     The  goods  will  be  ordered  from  The  American  Cereal  Co. 

Feb.  15.  Receive  a  check  (No.  27)  from  L.  M.  Wetzel  for  the  60-day  bill  of  the  16th  ult., 
less  rebate  and  plus  exchange. 

16.  Receive  an  invoice  from  The  American  Cereal  Company  for  merchandise  which 
was  ordered  yesterday.     (No.  30). 

Note  that  Quaker  Oats  are  billed  to  the  firm  at  the  same  price  at  which  Mr.  Kennedy  sold  them  to 
the  customer,  and  on  the  same  terms. 

Cereals  are  generally  sold  by  the  manufacturers  to  the  jobbers,  and  by  the  jobbers  to  the  retailers  at 
what  is  called  a  list  price.  The  jobber  pays  the  bills  which  are  rendered  to  him,  and  at  stated  periods 
the  manufacturer  accounts  to  the  jobber  for  the  commission  on  the  goods  which  the  jobber  bought.  The 
probable  object  of  this  plan  is  to  maintain  uniform  prices. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    213 

There  are  several  other  kinds  of  merchandise  in  handling  which  jobbers  in  groceries  use  this  plan  in 
part;  that  is,  in  addition  to  a  fixed  price,  there  is  a  rebate  which  is  allowed  at  stated  periods. 

Feb.  16.  The  shipping  clerk  returns  order  No.  42. 

16.  Receive  a  check  (No.  28)  from  J.  H.  Walters  &  Bro.  in  settlement  of  a  bill  of  Feb.  6. 

17.  Receive  order  No.  43,  sent  in  by  mail. 

17.  Receive  a  check  (No.  29)  from  the  W.  H.  Callow  Grocery  Co.  for  the  30-day  bill 
of  Jan.  17;  the  balance  of  the  check  is  to  be  applied  on  the  60-day  bill  of  the 
same  date.     10c  exchange  is  added. 

17.  Receive  a  check  (No.  30)  from  J.  W.  Bredin  &  Co.,  to  pay  the  bills  of  the  7th  inst. 

18.  Order  No.  43  has  been  filled. 

18.  Mr.  Kennedy's  expenses  for  the  week,  Feb.  13  to  18,  have  been  $22.55. 
18.  Receive  check  (No.  31)  from  C.  E.  Brooks  &  Bro.  for  bills  of  the  8th  inst. 
18.  Pay  the  salaries. 
18.  Deposit  all  checks  on  hand;  deduct  the  amount  of  the  exchange. 

Exchange  paid  to  the  bank  equals  the  amount  of  the  exchange  which  was  included  in  the  checks. 
Follow  instructions  on  Jan.  20th  as  to  making  the  proper  entries. 

Feb.  18.  Pay  $2.00  in  currency  for  postage  stamps.     Enter  in  the  petty  cash  book. 

18.  Pay  45c  in  currency  for  miscellaneous  office  suppUes.    This  is  also  a  petty  cash 

charge. 
18.  Balance  and  prove  your  petty  cash  book. 

20.  Receive  an  invoice  of  teas  from  John  C.  Siegfried  &  Co.  (No.  31). 

Note  the  terms,  which  are  unusual,  also  the  peculiar  form  of  the  bill. 

Feb.  20.  Receive  a  bill  for  teaming  from  the  Joseph  Stockton  Co.  (No.  32).     Pay  it  by 
check. 

Barrels  of  salt,  in  sacks,  are  counted  as  bbl.  Swiss  cheese  is  counted  as  one  piece,  and  both  kinds  of 
cigars  are  put  up  in  one  package. 

Feb.  21.  Receive  order  No.  44. 

21.  Receive  a  check  (No.  32)  from  G.  A.  &  C.  L.  Adkins  for  the  bills  of  Feb.  11,  less 
discount. 

23.  Order  No.  44  has  been  shipped. 

Since  the  sale  of  tea  is  an  infrequent  occurrence,  a  special  column  for  4-mo.  items  has  not  been  provided 
on  the  order  blank.  4-mo.  items  are  extended,  in  the  margin,  to  the  right  of  the  60  daj-s  column.  This 
order  requires  three  bills.     Remember  that  tea  is  sold  on  the  following  terms:   "4%  cash  in  10  days." 

23.  Receive  check  (No.  33)  from  the  L.  E.  Megan  Grocery  Co.  for  bills  of  the  13th  inst. 
23.  Receive  order  No.  45. 

Since  the  financial  responsibility  of  the  parties  who  sent  in  this  order  is  unknown  to  the  firm,  the 
shipment  is  to  be  made  C.  O.  D.  Although  it  is  a  mail  order,  prices  are  not  to  be  supplied  from  the  variable 
price  list.    They  have  been  agreed  upon  by  correspondence. 


214  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Feb.  24.  Receive  an  invoice  from  Francis  H.  Leggett  &  Co.,  for  sardines  and  olive  oil 

(No.  33). 
24.  Receive  an  expense  bill  from  the  Lake  Shore  &  Michigan  Southern  Railway  Co. 

for  freight  on  the  shipment  from  Francis  H.  Leggett  &  Co.  (No.  6).    Pay  it  by 

check. 
24.  Receive  order  No.  46,  which  is  sent  in  by  the  traveling  salesman. 

24.  Order  No.  45  is  filled. 

Follow  instructions,  which  were  given  when  the  C.  O.  D.  shipment  was  made  on  Jan.  30.  Draw  at 
nght  through  the  Farmers  State  Bank,  Janesville,  Wis. 

Feb.  24.  Five  cases  of  Barber's  200's  B.  &  C.  Matches  are  found  to  be  defective  and  are 
being  returned  to  the  Diamond  Match  Company. 

Bill  these  goods  back  to  the  creditor.    See  instructions  on  Feb.  3. 

Feb.  25.  Order  No.  46  has  been  shipped. 

25.  Draw  a  check  for  $50.00  in  favor  of  Mr.  Kennedy,  to  be  sent  to  him  for  traveling 
expenses. 

25.  Receive  a  check  (No.  34)  from  the  Shaw  Grocery  Co.  for  the  bill  of  the  15th  inst. 

less  discount,  but  including  exchange. 
25.  Pay,  by  check,  the  invoice  of  The  American  Cereal  Co.  of  the  16th  inst. 
25.  Deposit  all  checks  on  hand;  allow  for  exchange. 
25.  Pay  the  salaries. 

25.  Receive  orders  No.  47,  No.  48,  and  No.  49;  the  first  has  been  received  by  mail. 
25.  The  traveling  man's  expenses  for  the  week,  Feb.  20  to  25,  have  been  $17.95. 
27.  The  W.  H.  Callow  Grocery  Co.  write  that,  in  their  oponion,  they  are  overstocked 

with  sardines.     Therefore,  they  are  returning,  with  transportation  paid,  4  cases 

of  sardines  which  they  purchased  on  the  25th  inst. 

Send  a  credit  memorandum  and  make  the  proper  entry. 

Feb.  27.  By  examination  of  the  accounts  receivable,  you  find  that  the  following  bills  are 
past  due: 

G.  A.  &  C.  L.  Adkins,  30-day  bill  of  Jan.  5,  $34.13. 
L.  M.  Wetzel,  30-day  bill  of  Jan.  16,  $70.85. 
L.  M.  Wetzel,  30-day  bill  of  Jan.  25  (variable  amount). 

Draw  drafts,  at  sight,  on  these  customers.  Make  the  drafts  payable  to  the  Oak  Park  Trust  and 
Savings  Bank,  Oak  Park,  111.,  and  the  First  National  Bank,  Batavia,  111.,  respectively. 

The  drawing  of  drafts  on  debtors  is  usually  the  first  step  taken  in  the  collection  of  delinquent  accounts. 
One  or  more  "dunning"  letters  may,  or  may  not,  have  preceded  the  drawing  of  a  draft.  Drafts  may  be 
drawn  in  favor  of  the  bank  with  which  a  (creditor)  firm  does  its  banking,  in  which  case  the  draft  is  then 
forwarded  by  this  bank  to  some  bank  in  the  debtor's  town;  or  the  draft  may  be  sent  direct  to  a  bank  in 
the  city  or  town  in  which  the  debtor  resides. 

Draw  these  drafts  in  the  proper  manner  on  blanks  which  will  be  found  in  your  outfit.  Write  appropriate 
letters  to  accompany  the  drafts.  Submit  the  drafts  and  letters  to  your  teacher  for  criticism,  after  which 
file  both  in  the  outgoing  papers  envelope. 

Until  these  drafts  are  collected,  make  no  entry  for  them  in  your  books;  but  make  a  notation  on  the 
account  of  each  debtor  to  the  effect  that  a  draft  has  been  drawn;  give  the  date  of  the  draft. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    215 

Feb.  28.  Receive  a  credit  memorandum  from  The  American  Cereal  Company,  for  rebate 

(commission)  on  cereals  bought  during  February  (No.  34). 
28.  Receive  a  bill  (No.  35)  from  the  Joseph  Stockton  Co.,  for  teaming.     Pay  it  by 

check. 
28.  Credit  Mr.  Templeton,  Mr.  Parker  and  Mr.  Kennedy,  each,  with  his  salary. 
28.  Pay  $2.50,  from  petty  cash  fund,  to  Chicago  Window  Cleaning  Co.  for  cleaning 

windows, 
28.  Pay  Chicago  Towel  Supply  Co.,  $2.50  for  supplying  towels  and  soap  for  ofl&ce 

use  during  February.     Pay  the  bill  from  the  petty  cash  fund. 
28.  Summarize  the  entries  from  the  petty  cash  book  by  showing  the  amounts  that  are 

chargeable  to  the  different  expense  accounts.    Then  make  a  journal  entry  which 

charges  the  proper  expense  accounts  and  which  credits  the  Petty  Cash  Fund 

account. 
28.  Draw  a  check,  payable  to  Petty  Cash  Fund,  for  the  total  amount  of  expenditures 

of  petty  cash  and  make  the  proper  entry  for  this  check. 

It  will  be  seen  that  the  two  entries,  for  which  instructions  were  just  given,  will,  when  they  axe  recorded, 
restore  the  petty  cash  fund  to  its  original  amount.    Cash  will  be  obtained  on  this  check  at  the  bank. 

ADJUSTING  ENTRIES  PREPARATORY  TO  CLOSING  THE  BOOKS 

Feb.  28.  Compute  the  accrued  interest  on  the  note  receivable  which  was  made  by  Benj. 

Tamer.     Make  the  proper  entry  for  this  accrual.     The  amount  of  this  accrual 

will  depend  upon  the  price  list  which  you  are  using. 
28.  Estimate  the  amount  of  wages  accrued  to  date.    This  includes  the  accrued  wages 

for  2  days  of  all  employees  except  the  traveling  salesman.     Make  the  proper  entry. 
28.  Make  the  proper  entry  for  the  depreciation  of  office  equipment.    Follow  the  form 

of  the  entry  which  was  made  at  the  end  of  January. 
28.  While  the  firm  has  not  been  in  business  long  enough  to  determine  by  experience 

its  probable  losses  from  bad  debts,  yet  it  is  evident  that  some  provision  should 

be  made  against  losses  of  this  kind.    Therefore,  it  has  been  decided  that  a  sum 

equal  to  1%  of  the  sales  for  February  shall  be  reserved  for  losses  from  bad  debts. 

Make  the  proper  entry  to  create  this  reserve. 

MERCHANDISE  INVENTORY  AND  PREPAID  EXPENSES 

Merchandise  inventory  (freight  paid),  $5095.16. 

Advertising— 1-3  of  the  bill  of  The  Grocers'  Criterion  Co.,  $10.83. 

Box  and  Shipping — Shipping  boxes  valued,  at  cost,  $11.60. 

Expense — Office  suppUes  on  hand,  $5.00;  2-3  of  telephone  bill,  $10.00. 

Insurance — Premium  paid  in  advance  for  11  months. 

PROGRAM   FOR  CLOSING 

1.  Total  all  the  columns  in  all  the  books  of  original  entry,  and  prepare  a  recapitulation 
for  each  book  of  original  entry  for  which  a  recapitulation  was  made  on  January  31. 

2.  Verify  the  balance  of  the  cash  book  in  the  same  manner  that  it  was  verified  on 
January  31. 

3.  Test  the  correctness  of  the  subsidiary  ledgers.    Do  this  in  the  same  way  it  was  done 
on  January  31. 


216  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

4.  Close  and  rule  the  books  of  original  entry.  In  doing  so  follow  the  instructions  for 
the  closing  of  these  books  on  January  31. 

5.  Verify  the  Notes  Receivable  account. 

6.  Post  from  all  books  of  original  entry  and  take  a  trial  balance  from  the  general  ledger. 

7.  Prepare  a  statement  of  account  for  each  customer  whose  account  shows  a  balance. 

8.  Prepare  a  Trading  and  Profit  and  Loss  Statement  in  the  same  form  in  which  it  was 
prepared  on  January  31,  and  analyze  the  General  Expense  account. 

9.  Prepare  a  Balance  Sheet  in  the  same  form  in  which  the  one  for  January  31  was 
prepared. 

In  doing  this,  however,  the  mount  of  customers'  accounts  and  the  amount  of  the 
reserve  for  loss  on  accounts  receivable  should  be  interpolated  in  the  Balance  Sheet  in  a 
manner  similar  to  that  of  office  equipment  and  its  reserve. 

10.  Prepare  the  necessary  closing  journal  entries. 

11.  Rule  the  general  ledger  accounts  which  are  affected  by  the  closing  journal  entries. 
Remember  that  there  are  certain  accounts  which  contain  deferred  charges. 

12.  Make  the  proper  adjusting  entries  for  the  accruals  of  interest  and  wages. 

13.  Take  a  trial  balance  from  the  general  ledger. 

STORES  LEDGER 

If  it  is  desired  to  continue  the  use  of  a  stores  ledger  for  the  transactions  for  February, 
this  may  be  done  by  ruling  sheets  of  paper  to  correspond  with  the  ruling  of  the  stores 
ledger  which  was  used  for  the  work  in  January,  and  by  entering  upon  these  sheets,  in  the 
proper  accounts,  the  various  quantities  of  each  kind  of  merchandise  bought  and  sold  in  the 
transactions  of  February. 

DEPARTMENTAL  ACCOUNTING 

It  should  be  understood  that  in  a  large  business  the  departmental  accounting  is  done 
simultaneously  with  the  other  accounting  of  the  business.  That  is,  by  the  time  the  work 
on  the  general  books  is  finished,  the  work  on  the  departmental  books  is  also  completed.  There- 
fore, those  in  charge  of  special  books  of  original  entry,  subsidiary  ledgers,  or  departmental 
books,  may  compare  their  results  with  the  results  obtained  by  those  in  charge  of  the  general 
books.  For  example:  By  the  end  of  a  month,  the  cost  clerk  and  the  profits  clerk  have 
each  completed  his  work.  They  now  may  compare  their  results  (totals)  with  the  results 
which,  in  the  meantime,  have  been  obtained  by  the  head  bookkeeper. 

This  general  perspective  of  the  work  should  be  perceived  clearly  by  the  student  before 
beginning  the  departmental  accounting  for  February.  This  work  should  be  done  in  the 
following  order: 

1.  Determine  the  cost  (freight  paid)  of  the  goods  which  were  dehvered  on  each  order 
during  February.  Distribute  this  cost,  also  the  sales,  on  the  order  sheets  to  the  proper 
department;  then,  enter  the  costs,  by  departments,  in  the  department  costs  book. 

2.  In  the  department  sales  book,  enter  the  amounts  of  the  sales  (by  departments) 
which  are  shown  on  the  order  sheets. 

3.  Transfer  the  sales,  by  departments,  and  the  cost  of  the  goods  sold,  by  departments, 
to  the  departments  profits  book.  Then  determine  the  total  gross  profit  and  the  gross  profit, 
by  departments,  for  the  month;  these  two  amounts  should  agree. 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    217 

4.  Distribute,  by  departments,  the  purchases  for  February.  Be  sure  to  include  in 
this  distribution  all  freight  charges  on  the  goods  purchased. 

5.  Transfer  the  totals  of  the  departments  purchases  book  to  the  departments  profits 
book.  Record  these  totals  on  the  next  blue  line  just  underneath  the  inventories  by  stock 
for  January.  Then  add  the  inventories  for  January  and  the  purchases  for  February;  the 
result  will  be  the  total  purchases  by  departments.  These  results  should  be  recorded  on 
the  next  blue  line. 

On  the  first  blue  line,  below  the  total  purchases  for  February,  place  the  total  cost 
of  goods  sold,  by  departments.  Then  subtract  the  cost  of  the  goods  sold  (by  departments) 
from  the  total  purchases  (by  departments)  and  the  remainders  will  be  the  inventories 
by  departments. 

The  total  of  all  inventories  by  departments  will  be  the  inventory  of  merchandise  on 
hand.  This  amount  should  agree  with  the  inventory  which  is  taken  from  the  stores 
ledger. 

However,  there  will  be  a  slight  difference  between  these  inventories.  The  difference 
this  month,  like  that  last  month,  is  due  to  the  apportionment  of  freight  charges,  tares 
in  the  weights  of  coffee,  etc. 

COST  OF  DOING  BUSINESS 

Every  business  incurs  certain  expenses  in  conducting  its  affairs.  These  expenses, 
while  they  may  be  reduced  to  a  minimum  amount,  cannot  be  entirely  eliminated.  This 
fact,  of  course,  is  common  knowledge ;  therefore,  the  business  man  is  interested  in  knowing 
to  what  extent  he  may  reduce  the  expenses  of  the  business,  and  also  what  proportion  of  the 
gross  profits  is  being  used  to  defray  the  expenses  of  doing  business. 

The  expenses  or  costs  of  doing  business  are  commonly  called  overhead ;  and  while  this 
term  is  sometimes  used  in  a  more  specific  sense,  it  is  sufficiently  accurate  here  to  refer  to 
all  the  expenses,  or  cost  of  doing  business,  as  the  overhead. 

It  is  a  general  custom  to  determine  the  ratio  between  overhead  and  sales,  overhead  and 
gross  profits,  etc.  Sometimes  this  is  done  for  the  purpose  of  determining  a  base  price,  to 
which  may  be  added  a  certain  margin  of  profit.  Thus  it  will  be  seen  that  these  ratios 
may  be  an  aid  in  determining  a  selling  price  for  an  article.  But  selling  prices  are  not 
always  determined  in  this  maimer.  Perhaps  the  greatest  factor  in  determining  the  price 
at  which  an  article  may  be  sold,  is  competition.  This  element  cannot  be  wholly  eliminated 
in  business  any  more  than  can  the  expenses  of  doing  business.  However,  if  a  certain 
line  of  merchandise  is  being  sold  at  a  loss,  this  fact  will  be  revealed  when  the  ratio  or  per- 
centage of  overhead  to  gross  sales  is  known. 

In  many  instances  the  percentage  of  profit  is  low,  but  this  defect  is  often  overcome 
by  the  large  volume  of  business  in  those  articles  which  show  this  low  rate  of  profit  and  for 
which  there  is  a  constant  demand. 


PROBLEMS  IN  COST  OF  DOING  BUSINESS 

1.  What  per  cent  should  be  added  to  the  cost  of  goods  sold  in  order  to  cover  the  overhead  of  the  business 
for  January?  During  February?  2.  The  overhead  is  what  per  cent  of  the  net  sales  for  January?  For 
February?  3.  The  overhead  is  what  per  cent  of  the  gross  profits  for  January?  For  February?  4.  The 
net  profit  is  what  per  cent  of  the  net  sales  for  January?    For  February? 


218  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

EXERCISE  XXIV 

Prepare  for  the  Western  Grocery  House  a  Comparative  Trading  and  Profit  and  Loss  Statement  for 
the  two  months  just  ended.  Arrange  this  comparison  so  that  the  increase  or  the  decrease  may  be  extended' 
to  the  proper  column  on  the  right.     Prove  the  results  of  this  statement. 

QUESTIONS  ON   THE  COMPARATIVE   TRADING   AND   PROFIT  AND  LOSS  STATEMENT 
OF   THE   WESTERN   GROCERY  HOUSE 

1.  What  was  the  per  cent  of  increase  in  the  volume  of  the  net  sales  for  February  over  those  for  January? 

2.  The  cost  of  the  goods  sold  during  January  was  what  per  cent  of  the  net  sales  for  January?     For  February? 

3.  Did  the  overhead  for  February  increase  by  a  greater  per  cent  over  the  overhead  for  January  than  the 
net  sales  for  February  increased  over  the  net  sales  for  January?  4.  The  selUng  expense  was  what  per  cent 
of  the  net  sales  for  January?  For  February?  5.  The  general  expense  was  what  per  cent  of  the  net  sales 
for  January?  For  February?  6.  The  net  profit  was  what  per  cent  of  the  net  sales  for  January?  For 
February?     7.  The  net  profit  for  each  month  is  what  per  cent  of  the  capital  invested  by  the  proprietors? 

EXERCISE  XXV 

Prepare  a  Comparative  Balance  Sheet  for  the  Western  Grocery  House  for  the  two  months  just  ended. 
Arrange  this  comparison  so  that  the  increase  or  decrease  in  assets,  liabilities,  and  capital  may  be  extended 
into  the  proper  columns  on  the  right  of  the  statement.  Prove  the  results  by  a  summary  of  the  increases 
and  decreases. 

QUESTIONS  ON   THE  COMPARATIVE  BALANCE  SHEET 
OF   THE  WESTERN  GROCERY  HOUSE 

1.  By  what  per  cent  did  the  total  assets  on  February  28  exceed  the  total  assets  on  January  31?  2.  By 
what  per  cent  did  the  current  assets  on  February  28  exceed  the  current  assets  on  January  31?  3.  By  what 
per  cent  did  the  total  current  liabilities  on  February  28  exceed  the  total  current  liabiUties  on  January  31? 

4.  What  ratio  exists  on  February  28  between  the  total  current  assets  and  the  total  current  liabilities? 
What  ratio  existed  on  January  31?  5.  The  total  current  assets  are  what  per  cent  of  the  total  assets  on 
February  28?     On  January  31? 

EXERCISE  XXVI 

The  contract  of  the  firm  with  J.  C.  Kennedy,  salesman,  provides  that  after  three  months  Kennedy  is 
to  receive  a  bonus  of  10%  of  the  gross  profit  on  all  orders  that  are  taken  by  him.  The  firm  now  desires 
to  know  what  a  bonus  of  this  kind  would  amount  to,  if  the  agreement  for  a  bonus  were  applied  to  the 
orders  which  were  taken  by  Kennedy  diuing  January  and  February. 

Therefore,  you  are  to  prepare  a  report  of  Kennedy's  sales  as  follows :  Arrange,  numerically,  all  orders 
that  have  been  taken  by  Kennedy;  do  this  in  such  a  manner  that  the  report  will  show  the  amount  of  each 
sale,  the  cost  of  the  goods  sold  on  each  order,  and  the  gross  profit  on  each  order;  then,  compute  the  amount 
of  the  bonus  for  the  two  months. 

COMPARATIVE  STATISTICS 

It  is  a  common  practice  in  business  to  make  tabulated  comparisons  that  will  show 
increases  or  decreases  in  the  volume  of  sales,  gross  profits,  expenses,  etc.  These  com- 
parisons may  be  made  by  departments,  by  salesmen,  by  territories,  etc.  Sometimes  the 
comparisons  are  made  by  means  of  graphs  instead  of  tabulations. 

These  comparisons  often  furnish  information  that  is  valuable  to  the  management  of 
a  business  in  planning  extension  of  the  business;  in  determining  economies  in  expenses,  etc. 

EXERCISE  XXVII 

Arrange,  in  tabular  form  for  comparison,  the  sales  of  the  Western  Grocery  House,  by  departments, 
for  the  months  of  January  and  February;  this  information  can  be  obtained  from  the  department  sales 
register.     Rule  paper  to  correspond  with  the  following  illustration: 


SET  VI— WHOLESALE  ACCOUNTING  FOR  GROCERY  BUSINESS— TWO  MONTHS    219 

Comparative  Sales 


January 

February 

Increase 

Decrease 

Department  No.  1 

No.  2 

No.  3 

No.  4 

No.  5 

No.  6 

No.  7 

No.  8 

In  doing  this  work,  the  total  sales  for  January  and  the  total  sales  for  February  should  correspond  vrith 
the  total  sales,  respectively,  as  shown  by  the  Trading  and  Profit  and  Loss  Statements  for  January  and  for 
February.  Likewise,  the  net  increase  or  the  net  decrease  should  agree  with  the  difference  between  the 
total  sales  for  January  and  the  total  sales  for  February. 

EXERCISE  XXVIII 

It  is  extremely  important  in  a  large  business  to  know  whether  the  gross  profits,  by  departments,  is 
increasing  or  decreasing  from  month  to  month,  or  from  year  to  year.  Therefore,  you  may  arrange  a  com- 
parison of  the  gross  profits,  by  departments,  from  the  information  that  is  contained  in  the  departments 
profits  register  of  the  Western  Grocery  House,  for  the  months  of  January  and  February. 

This  comparison  should  be  arranged  similarly  to  the  comparative  sales  sheet  that  was  prepared  in 
Exercise  XXVII.  The  total  gross  profit  for  January  and  the  total  gross  profit  for  February  should  agree 
with  the  gross  profit  that  is  shown  by  the  Trading  and  Profit  and  Loss  Statement  for  each  month,  respec- 
tively. 

EXERCISE  XXIX 

Arrange  a  comparative  expense  report  for  the  months  of  January  and  February.  Show  whether  the 
different  expenses  increased  or  decreased  during  February  over  that  of  January. 

The  amount  of  each  kind  of  expense  may  be  obtained  from  the  Trading  and  Profit  and  Loss  Statements 
for  the  two  months  which  are  being  compared.  The  net  increase  or  the  net  decrease  should  agree  with 
the  difference  between  the  total  expenses  for  January  and  the  total  expenses  for  February. 


GRAPHIC  ILLUSTRATIONS,  OR  CHARTS 

In  many  instances  the  manager  of  a  business  desires  to  know  the  tendencies  of  depart- 
ments, of  sales,  of  expenses,  of  gross  profits,  etc.,  rather  than  the  exact  figures  which  show 
the  tendencies.  This  information  may  be  furnished  to  him  by  means  of  graphs.  The 
indicant  lines  of  a  graph  may  be  drawn  in  different  colors  to  represent  different  results; 
thus,  gross  profits  may  be  represented  by  a  black  line  and  expenses  by  a  red  line. 

It  sometimes  happens  that  the  sales  of  a  business  will  increase  during  a  certain  month 
without  a  corresponding  increase  in  expenses  during  that  month,  or  the  sales  may  decrease 
without  a  corresponding  decrease  in  expenses.  If  this  information  is  compiled  in  chart 
form  and  continued  from  month  to  month  or  from  year  to  year,  it  will  show  to  the  owner 
or  manager  of  a  business  that  there  is  a  point  beyond  which  the  sales  must  reach  in  order 
to  produce  a  net  profit  or  that  the  expenses  must  be  reduced  proportionately  with  the  sales. 

Graphs  may  be  arranged  from  circles,  squares,  rectangles,  lines,  etc.  The  illustration 
on  the  next  page  shows  a  graph  arranged  from  rectangles. 


220 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 

A  GRAPH 


If) 

Q 
Z 

D 
O 
I 
H 

JANUARY 

FEBRUARY 

MARCH 

APRIL 

MAY 

JUNE 

8 

7 

^^^ 

\^ 

^ 

6 

L-"-^"""'''^ 

^^ 

5 

-^^ 

"^^^ 

^^ 

4 

3 

2 

1 

EXERCISE  XXX 

The  gross  profits  and  the  expenses  respectively  of  The  Walker-Gordon  Co.  for  six  months  follow: 
January,  $7500.00,  $6500.00;  February,  $8000.00,  $6500.00;  March,  $8500.00,  $7000.00;  April,  $8500.00, 
$6500.00;  May,  $8000.00,  $7000.00;  June,  $9500.00,  $7500.00. 

Prepare  a  graph  in  two  colors  that  will  show  the  results  for  the  six  months, 

EXERCISE  XXXI 
The  Clayton  Lambert  Co.'s  sales,  cost  of  sales,  and  expenses  for  one  year  are  as  follows: 


Sales 

Cost  of 
Sales 

Expenses 

Sales 

Cost  of 

Sales 

Expenses 

Jan.    $100,000 

$60,000 

$30,000 

July  $110,000* 

$70,000 

$25,000 

Feb.     120,000 

70.000 

40,000 

Aug.    100,000 

70,000 

25,000 

Mar.     140,000 

80,000 

40,000 

Sep.     125,000 

75,000 

35,000 

Apr.      110,000 

70,000 

35,000 

Oct.     130,000 

75,000 

40,000 

May     120,000 

80,000 

30,000 

Nov.    140,000 

80,000 

45,000 

June     100,000 

70,000 

30,000 

Dec.     150,000 

85,000 

45,000 

Prepare  two  graphs;  one  that  will  compare  sales  and  cost  of  goods  sold;  and  one  that  will  compare 
gross  profit  and  expenses. 


REAL  ESTATE— ITS  IMPROVEMENTS,  EXPENSES,  AND  INCOME 


221 


REAL  ESTATE— ITS  IMPROVEMENTS,  EXPENSES,  AND  INCOME 

The  ownership  of  real  estate  is  seldom  essential  to  a  business;  but  there  are  certain 
conditions,  however,  under  which  the  ownership  of  this  class  of  property  is  desirable. 
A  business  usually  purchases  real  estate  to  use  it  as  a  home  or  as  an  aid  in  the  operation 
of  the  business,  but  sometimes  real  estate  is  purchased  for  speculation. 

In  many  kinds  of  business,  in  which  it  may  seem  that  the  ownership  of  land  is  essen- 
tial, sufficient  land  may  be  leased  for  the  purposes  of  the  business. 

Consequently,  it  is  generally  a  question  of  which  plan — owning  or  leasing — is  the 
more  economical  one  for  the  business.  It  may  be  that  ownership  is  more  economical  than 
leasing,  but,  on  the  other  hand,  owTiership  may  require  an  investment  of  a  large  portion 
of  the  capital  of  the  business;  and  it  may  be  that  the  investment  required  is  entirely  beyond 
the  financial  means  of  the  business. 

When  real  estate  is  purchased  for  the  use  of  a  business,  the  capital  required  for  its 
purchase  is  no  longer  a  liquid  asset  but  a  fixed  asset,  and,  therefore,  can  not  be  considered 
as  working  capital  available  for  the  expansion  of  the  business. 

Land  is  usually  considered  as  improved  or  unimproved.  These  terms  are  almost 
impossible  of  exact  definition  as  their  meanings  depend  entirely  upon  the  uses  to  which 
the  land  is  to  be  put.  Land  that  is  well  improved  and  suitable  for  the  purposes  of  a  farmer 
may  be  unimproved  and  unsuitable  for  the  purposes  of  a  factory  or  for  the  erection  of 
modern  buildings  in  a  city. 

It  may  be  stated,  however,  as  a  general  rule  that  any  expenditure  that  increases  the 
value  of  the  land  may  be  regarded  as  an  improvement  of  the  land. 


LAND  AND  BUILDINGS  ACCOUNTS 

It  is  a  common  practice  to  estabhsh  one  account  that  is  used  to  show  the  cost  of  land, 
and  its  improvements,  and  another  account  that  is  used  to  show  the  cost  of  the  buildings 
erected  upon  the  land.     Sometimes,  only  one  account  is  kept  for  both  land  and  buildings. 

EXERCISE  XXXII 

Trace  the  transactions  in  this  exercise  to  the  illustrative  accounts  which  follow: 

Feb.    2.  The  Fireside  Baking  Co.  purchased  a  tract  of  land,  100  ft.  x  160  ft.,  for  $3500.00. 

10.  Paid  a  recording  fee  of  $4.28. 

15.  Paid  a  surveyor  $15.00  for  surveying  the  property. 

25.  Paid  attorney's  fee,  $50.00,  for  examination  of  the  title. 

May  31.  Paid  $260.00  for  the  construction  of  a  sewer. 

June  20.  Paid  for  paving,  $428.50. 

25.  Paid  on  contract  for  the  building,  $3000.00. 

July  15.  Paid  on  contract  for  the  building,  $6500.00. 

20.  Paid  for  sidewalks,  $385.00. 

31.  Paid  for  fences,  $185.00. 

Aug.  10.  Paid  on  contract  for  the  building,  $2132.75. 

BUILDINGS 


June 

25 

Pm't  on  bldg. 

3000 

00 

July 

15 
31 

Pm't  on  bldg. 
Fences 

6500 
185 

00 
00 

Aug. 

10 

Pm't  on  bldg. 

2132 

75 

222 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 

LAND 


Feb. 

2 

10 

15 

25 

May 

31 

June 

20 

July 

20 

3500 

00 

4 

28 

15 

00 

50 

00 

260 

00 

428 

50 

385 

00 

Purchase  Price 

Recording  Fee 

Surveying 

Exam,  of  title 

Sewer 

Paving 

Sidewalks 


QUESTIONS  ON  THE  ILLUSTRATIVE  LAND     AND     BUILDINGS  ACCOUNTS 

1.  What  does  the  debit  side  of  the  Land  account  show?  2.  What  does  the  debit  side  of  the  Building 
account  show?  3.  What  does  the  total  of  both  these  accounts  show?  4.  Has  any  income  been  derived 
from  this  property?  5.  Has  there  been  any  expense  incurred  on  behalf  of  this  property?  6.  What  is  the 
nature  of  the  expense,  if  any?  7.  If  you  wanted  to  show  both  these  accoimts,  as  one  account,  how  would 
you  do  it? 

BALANCING,  CLOSING,  AND  RULING  LAND  AND  BUILDINGS  ACCOUNTS 

If  one  account  is  kept  to  show  the  amount  of  the  investment  in  land  and  another  for 
the  investment  in  buildings,  each  account  is  regarded  as  an  asset  and,  at  the  end  of  a 
fiscal  period,  each  should  appear  upon  the  Balance  Sheet  among  the  fixed  or  permanent 
assets  of  the  business. 

There  is  seldom  any  need  to  rule  either  account.  It  may  be  desirable  or  necessary, 
at  times,  to  show  the  value  of  the  property  represented  by  each  account,  as  one  amount, 
or  it  may  be  necessary  to  forward  either  or  both  accounts  to  another  page  of  the  ledger. 
In  such  instances  they  may  be  balanced  and  ruled  just  like  the  Cash  account. 

It  is  seldom  necessary  to  close  either  of  these  accounts.  In  case  the  property,  repre- 
sented by  them,  is  sold  at  a  profit,  each  account  may  be  credited  for  enough  to  close  it. 
The  difference,  or  profit,  should  be  credited  as  a  profit  to  the  Profit  &  Loss  account  or  to 
some  account  which  bears  an  appropriate  title.  Such  a  title  may  be  as  follows:  Appre- 
ciation of  Land  &  Buildings,  Appreciation  of  Real  Estate,  Profit  on  Real  Estate,  etc. 

However,  if  the  property  be  sold  at  a  loss,  each  account  should  be  credited  with  an 
appropriate  amount  and  the  amount  of  the  loss  (which  should  be  enough  to  close  each 
account)  should  be  charged  to  the  Profit  &  Loss  account  or  to  the  proper  reserve  account, 
provided  a  reserve  has  been  established. 

EXERCISE  XXXIII 

Prepare  separate  accounts,  which  will  show  the  cost  of  the  land  and  the  cost  of  the 
buildings,  from  the  following  statement  of  facts: 

Oct.     1.  The  Danforth  Dairy  Co.  purchased  and  paid  for  5  lots,  each  30'  x  140',  at  $500  per  lot. 

12.  Paid  recording  fee  and  stamp  tax  $7.82. 

25.  Paid  surveyor's  charges  $41.50. 
Nov.    1.  Paid  sewer  assessment,  $225.00. 

20.  Paid  for  paving,  $785.50. 

Dec.  10.  Paid  $2500.00  on  the  building  contract. 

21.  Paid  $1500.00  on  the  building  contract. 
Jan.  20.  Paid  $5000.00  on  the  building  contract. 
Feb.  18.  Paid  $2750.00  on  the  building  contract. 
Mar.  15.  Paid  $2118.50  on  the  building  contract. 
Apr.  20.  Paid  for  cement  driveway,  $324.85. 


REAL  ESTATE— ITS  IMPROVEMENTS,  EXPENSES,  AND  INCOME  223 

QUESTIONS  ON  THE  ABOVE  LAND  AND  BUILDINGS  ACCOUNTS 

1.  What  does  the  debit  side  of  each  account  show?  2.  What  does  the  credit  of  each  account  show? 
3.  What  does  the  balance  of  each  account  show?  4.  If  the  company  sold  one  of  the  lots  at  cost,  for  what 
amount  would  you  credit  the  Land  account?  5.  If  the  company  sold  one  of  the  lots  at  a  profit  of  $200.00, 
for  what  amount  would  you  credit  the  Land  account?  6.  To  what  account  should  the  profit  from  the  sale 
of  the  lot,  mentioned  here,  be  credited? 

MORTGAGE  ON  REAL  PROPERTY 

Frequently  the  purchase  of  real  estate  involves  the  issuing  of  a  mortgage  as  security 
for  a  part  of  the  purchase  price.  That  is,  a  note  or  a  series  of  notes  is  issued  for  that  part 
of  the  purchase  price,  which  remains  unpaid,  and  the  note  or  notes  are  secured  by  a  mort- 
gage upon  the  property  purchased.  This  liability  may  be  included  in  the  Notes  Payable 
account;  but  this  is  not  the  usual  practice.  It  is  better  to  establish  a  separate  account 
for  a  liability  of  this  kind  and  to  designate  the  account  in  such  a  manner  that  its  title  will 
indicate  the  nature  of  the  liability  as  follows:  Mortgage  Payable;  Mortgage  Payable  on 
Real  Estate;  Mortgage  Payable,  on  142  Elm  St.;  etc. 

A  mortgage  is  a  preferred  claim  upon  the  particular  property  which  is  given  as  security 
for  the  obligation  as  well  as  a  liability  of  the  person  issuing  the  mortgage.  Consequently, 
a  mortgage  is  a  liability  of  a  different  class  from  the  ordinary  promissory  note  payable, 
and,  for  this  reason,  the  former  should  be  placed  on  the  Balance  Sheet  as  a  fixed  or 
permanent  liability,  not  as  a  current  liability. 

However,  the  account  itself  is  treated  on  the  ledger  in  the  same  manner  as  the  Notes 
Payable  account. 

PROPERTY  EXPENSES  AND  INCOME 

There  are  certain  expenses  attendant  upon  the  ownership  of  real  estate,  whether  it  is 
improved  or  unimproved;  and  it  should  be  understood  that  the  term,  improved  property, 
as  used  here,  means  property  that  has  been  put  in  such  condition  that  it  is  capable  of 
producing  income.  There  are  exceptional  cases,  however,  in  which  imimproved  property 
may  produce  income,  but  improved  property  should  always  produce  income  sufficient  to 
pay  expenses  and  to  leave  a  net  income  for  the  use  of  the  capital  employed. 

One  account  usually  is  sufficient  to  provide  for  the  expenses  and  income  from  real 
property,  unless  the  rental  and  care  of  the  property  really  constitute  a  separate  business. 
In  such  a  case  it  would  perhaps  be  necessary  to  establish  several  accounts  with  which  to 
show  the  income  and  the  operating  expenses. 

The  income  from  real  estate  is  usually  derived  from  renting  or  leasing  it.  The  expenses 
include  such  items  as  taxes,  insurance,  repairs,  depreciation,  etc.  If  only  one  account  is 
kept  to  show  the  expenses  and  income  from  land  and  buildings,  it  may  be  called  Property 
Expenses  and  Income,  Real  Estate  Expense  and  Income,  Expenses  and  Income  on  Land 
and  Buildings,  etc.  Whatever  title  is  selected  for  the  account,  it  should  be  a  title  that  is 
suggestive  of  what  the  account  contains. 

It  is  not  unusual  for  a  business  that  occupies  its  own  property  to  "charge  itself  rent" 
for  the  use  and  occupation  of  the  property.  This  expression  simply  means,  that  although 
the  business  occupies  its  own  property  and  is  free  from  the  usual  charge  for  rent,  to  which 
competing  businesses  may  be  subjected,  nevertheless  some  charge  should  be  made  for  the 
use  of  the  property  which  represents  a  considerable  portion  of  the  capital  of  the  business. 


224  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

The  amount  to  be  charged  as  rent  is  usually  determined  by  what  would  have  to  be 
paid  for  similar  quarters  in  a  similar  location.  When  the  amount  that  is  to  be  charged 
as  rent  has  been  computed,  the  bookkeeper  may  give  effect  to  this  computation  by  means 
of  a  journal  entry  similar  to  the  following: 

Rent 

Building  (Property)  Expense  &  Income 

Such  an  entry  produces  a  charge  for  the  use  of  the  capital  which  is  represented  by 
the  investment  in  land  and  buildings,  and  this  charge  becomes  one  of  the  factors  in  esti- 
mating the  cost  of  doing  business  or  in  estimating  the  cost  of  production  in  a  manufacturing 
business.  Altogether,  it  is  a  very  simple  way  of  making  an  allowance  for  the  use  of  capital 
which  is  invested  in  property  for  the  use  of  the  business. 

CLOSING  AND  RULING  PROPERTY  EXPENSE  AND  INCOME  ACCOUNT 

At  the  end  of  a  fiscal  period,  this  account,  which  shows  either  a  net  loss  or  a  net  profit, 
should  be  closed  into  the  Profit  &  Loss  account. 

When  the  Property  Expense  and  Income  account  has  been  closed  it  should  be  ruled 
the  same  as  an  expense  account. 

EXERCISE  XXXIV 

Prepare  an  account  for  Property  Expense  and  Income  from  the  following  statement 
of  facts: 

James  Bowen  owned  property  at  137-139  High  St.  consisting  of  two  stores,  and  1  flat 
above  each  store.     Bowen  took  possession  of  the  property  en  Oct.  27. 

Nov.    1.  Received  rent,  for  November,  from  one  store  and  flat,  $90. 
2.  Received  rent,  for  November,  from  one  store  and  flat,  $90. 
10.  Paid  for  repairs  to  furnace,  $10.80. 
20.  Paid  for  insurance,  $22.50. 
27.  Paid  for  replacing  broken  glass,  $12.50. 
Dec.     1.  Received  rent,  for  December,  from  one  store  and  flat,  $90.00. 
2.  Received  rent,  for  December,  from  one  store  and  flat,  $90.00. 
10.  Paid  coal  bill,  $113.80. 

27.  Paid  taxes  for  following  year,  $182.60. 

28.  Paid  for  insurance  on  building,  $22.80. 

QUESTIONS  ON  THE  ABOVE  PROPERTY  EXPENSE  AND  INCOME  ACCOUNT 

1.  What  does  the  debit  side  of  this  account  show?  2.  What  does  the  credit  side  of  this  account  show? 
3.  What  does  the  balance  of  this  account  show?  4.  If  the  debit  side  of  this  account  were  larger  than  the 
credit  side,  what  would  the  balance  show? 

DEPRECIATION  OF  BUILDINGS 

One  of  the  expenses  incidental  to  the  ownership  of  a  building  is  depreciation.  Build- 
ings, like  other  kinds  of  property,  are  constantly  being  worn  out.  The  rate  of  deprecia- 
tion depends  upon  the  kind  of  material  that  has  been  used  in  the  construction  of  the  build- 
ing and  the  uses  to  which  the  building  has  been  subjected.  A  building  constructed  of 
wood  depreciates  more  rapidly  than  a  building  constructed  of  stone,  brick,  or  concrete. 
The  rate  of  depreciation  will  probably  vary  from  1H%  to  4%  per  year. 


REAL  ESTATE— ITS  IMPROVEMENTS,  EXPENSES,  AND  INCOME 


225 


If  depreciation  is  to  be  estimated  upon  a  building,  it  is  necessary  to  know  either  the 
original  cost  of  the  building  or  its  fair  value  at  the  time  the  depreciation  is  to  be  estimated. 
In  many  instances  this  necessitates  two  accounts,  one  for  the  land  and  one  for  the  building 
or  buildings  because  depreciation  is  seldom  estimated  on  land.  After  the  depreciation 
has  been  estimated,  it  is  given  effect  by  means  of  a  journal  entry,  as  follows: 

Expenses  &  Income  (Depreciation  of  Building) 
Reserve  for  Depreciation  of  Building 

ACCOUNTS  WHEN  MORE  THAN  ONE  PROPERTY  IS  OWNED 

It  follows,  therefore,  that  when  more  than  one  piece  of  improved  property  is  owned 
there  should  be  a  series  of  accounts  for  each  piece  of  property,  in  order  to  make  a  correct 
accounting  for  each. 

Assume  that  James  Fraser  owns  two  pieces  of  property,  both  free  from  encumbrances, 
and  desires  to  keep  accounts  with  each  according  to  the  plan  just  outlined.  His  accounts 
would  be  as  follows : 


Land— 118  Fourth  St. 


Building— 118  Fourth  St. 


Expenses  &  Income — 118  Fourth  St. 


Reserve  for  Depreciation — 118  Fourth  St. 


Land — Wilson  Apartments 


Building — Wilson  Apartments 


Expenses  &  Income — Wilson  Apartments  Reserve  for  Depreciation — Wilson  Apartments 


Thus  it  will  be  seen  that  the  address  or  the  name  of  the  property  is  used  to  designate  the 
accounts  properly. 

If  only  one  account  is  kept  to  show  the  value  of  the  land  and  building  or  buildings,, 
it  is  not  always  possible  to  determine  from  the  account  the  value  of  the  building  or  build- 
ings, apart  from  the  land.  This  may  be  done,  however,  by  making,  upon  the  account, 
a  notation  as  to  the  value  of  each.  For  a  small  business,  this  is  perhaps  a  very  satisfactory 
way  of  treating  this  account,  but  in  most  instances  two  accounts  should  be  kept. 


ACCOUNTS  DURING  CONSTRUCTION  OF  BUILDING 

When  a  contract  is  let  for  the  construction  of  a  building,  an  entry,  similar  to  the 
following,  may  be  made  to  record  the  liability : 

Building  Contract  120,000.06 

Fuller  Construction  Co.  $20,000.00 


226  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

Then,  when  a  payment  is  made  on  the  contract,  it  should  be  charged  to  the  personal 
account  of  the  contractor,  and  the  final  payment  should  close  the  personal  account .  The 
account  with  Building  Contract  may  then  be  closed  into  an  account  called  Building  or  into 
the  Land  and  Building  account,  if  only  one  account  is  maintained.  If  there  were  several 
contractors  for  different  portions  of  the  building,  the  amount  of  the  contract  with  each 
may  be  charged  to  the  Building  Contracts  account  and  credited  to  a  personal  account  with 
each  contractor.  Then,  the  amount  of  the  payment,  when  made  to  each  contractor  may 
be  charged  to  his  personal  account. 

The  accounts  which  have  been  treated  here  are  those  accounts  peculiar  to  the 
ownership  of  real  property,  and,  therefore,  in  no  manner  do  they  concern  the  accounts  of 
a  building  contractor  or  the  accounts  of  a  real  estate  operator,  though  there  is  a  certain 
similarity.  In  order  to  become  familiar  with  the  accounts,  which  are  peculiar  to  these 
two  kinds  of  business,  it  would  require  the  study  of  each  business. 

REAL  ESTATE  PROBLEMS 

1.  George  Wilkins  owns  a  house  and  lot  which  cost  him  $6500.00.  What  would  the  interest  on  his 
investment  amount  to  at  6%  per  annum? 

(a)  If  this  house  were  not  occupied  what  would  be  the  loss  to  Wilkins,  disregarding  taxes  and  other 
expenses? 

(b)  If  Wilkins,  himself,  occupies  the  house,  would  you  consider  the  interest  on  the  investment  as  a  loss? 

(c)  If  Wilkins  did  occupy  it,  what  would  you  consider  the  use  of  the  house  worth? 

2.  Charles  Davis  owns  a  business  building  and  lot  which  cost  $12,500.00.  H>  rents  it  for  $90  per 
month.  He  pays  taxes,  $110.40  per  year;  insurance,  $32,00  per  year;  repairs,  $26.75.  What  is  the  net 
income  from  the  property? 

3.  George  Jones  bought  a  lot  for  $1200.00,  and  erected  a  dwelling  on  it.  He  paid  the  following:  to 
a  contractor  for  construction  of  the  house,  $4387.50;  for  fences  $56.85;  for  building  a  garage  which  will 
accommodate  two  cars,  $435.00.  What  wa.s  the  total  cost  of  the  property?  How  much  was  invested  in 
land?    How  much  was  invested  in  buildings? 

4.  L.  M.  Hazen  purchased  a  house  and  lot  for  $6500.00.  The  house,,  which  stood  on  the  lot  at  the  time 
of  purchase,  was  sold  for  $500.00  and  removed.  He  then  erected  an  apartment  building  that  cost  as  follows : 
general  contract  for  construction  of  the  building,  $31,385.00;  fences,  $110.75;  garage  for  4  cars,  $875.00. 
What  was  his  total  investment?    How  much  was  invested  in  the  land  and  how  much  in  the  buildings? 

5.  At  present  the  Modern  Manufacturing  Co.  is  renting  quarters  that  cost  $3000.00  per  year.  It  will 
cost  $30,000.00  to  erect  a  suitable  building  for  the  company  and  the  annual  expenses  of  maintaining  the 
building  will  be  $1500.00;  in  addition  to  this  maintenance  charge,  insurance  and  taxes  will  cost  $550.00 
per  year.  Allowing  6%  interest  on  the  cost  of  the  building  to  be  erected,  which  would  be  the  more  econom- 
ical, to  continue  to  rent  or  to  erect  and  occupy  the  proposed  building? 

MISCELLANEOUS  ACCOUNTS 

Unusual  conditions  sometimes  arise  and  must  be  met  in  any  business,  regardless  of 
its  form  of  organization;  in  meeting  these  conditions  the  bookkeeper  often  finds  it  difficult 
to  invent  appropriate  names  for  the  necessary  accounts  and  to  record  properly 
the  transactions  which  are  essential  because  of  the  peculiar  conditions. 

A  few  of  the  things  that  are  not  encountered  in  everyday  bookkeeping  are  here 
explained  in  the  hope  that  they  may  prove  helpful. 

LOSSES  FROM  FIRE 

Most  business  men  make  some  provision,  by  insurance,  for  possible  losses  from  fire, 
theft,  storms,  or  other  casualties,  and,  in  case  a  loss  occurs,  the  bookkeeper  should  be  able 
to  make  the  proper  entries  to  record  the  loss  and  to  make  all  necessary  adjustments. 
Losses  sometimes  occur  regardless  of  the  kind  of  business  or  the  form  in  which  the  business 
is  organized. 


MISCELLANEOUS  ACCOUNTS  227 

As  an  illustration  of  proper  adjusting  entries,  let  us  assume  the  following  facts: 
A  warehouse  and  stock  of  merchandise  of  Logan  &  Brj^an  were  totally  destroyed  by  fire  on 
June  10.  Their  books  showed  the  building  to  be  valued  at  $20,000.00  and  the  merchandise 
to  be  valued  at  $30,000.00.  They  received  from  insurance  companies,  $12,000.00  for  loss 
of  building,  and  $20,000.00  for  loss  of  merchandise. 

Proper  entries  to  record  the  losses  and  to  show  the  necessary  adjustments  because  of 
these  losses  may  be  made  as  follows: 

Fire  Loss  on  Building  $20,000.00 

Building  $20,000.00 

Cash  $12,000.00 

Fire  Loss  on  Building  $12,000.00 

* 

Profit  &  Loss  $  8,000.00 

Fire  Loss  on  Building  $  8,000.00 

If  a  new  building  is  erected,  the  proper  accounts  may  then  be  created  for  the  building 
at  the  time  it  is  built. 

Rre  Lees  on  Merchandise  $30,000.00 

Purchases  (or  Inventory)  $30,000.00 

Cash  $20,000.00 

Fire  Loss  on  Merchandise  $20,000.00 

Profit  &  Loss  $10,000.00 

Fire  Loss  on  Merchandise  $10,000.00 

Losses  from  other  sources  may  be  treated  similarly. 

The  account,  which  represents  the  property  that  has  been  damaged  or  destroyed,  or 
to  which  the  cost  of  the  property  has  been  charged,  should  be  kept  in  such  a  manner  that 
the  value  of  the  property  may  be  determined  from  the  account.  The  object  of  the  first 
entry  is  to  remove  from  the  account  the  value  of  the  property  that  is  damaged  or  destroyed. 
The  object  of  the  second  entry  is  to  apply  the  amount  of  the  compensation  to  the  reduction 
of  the  loss.  The  object  of  the  third  entry  is  to  dispose  of  the  loss  that  has  been  caused  by 
the  casualty. 

EXERCISE  XXXV 

On  February  15,  the  Hamlin  Trading  Co.  lost,  by  fire,  one  of  its  warehouses  which  was  valued  at 
$15,000.00  and  which  was  known  as  the  Denver  warehouse.  The  property  had  been  carried  on  the  books 
of  the  company  at  that  valuation,  in  an  account  called  Land  &  Buildings.  The  company  received  $10,000.00 
from  insurance  and  the  bookkeeper  credited  this  amount  to  the  Land  &  Buildings  account.  Afterwards, 
a  new  building  was  erected  at  a  cost  of  $20,000.00  and  this  amount  was  charged  to  the  Land  &  Buildings 
account.     This  account  then  showed  a  balance  of  $125,000.00. 

Make  proper  entries  to  record  this  loss  and  all  necessary  adjustments  and  to  show  the  correct  balance 
of  the  Land  &  Buildings  account  after  the  erection  of  the  new  building. 

EXERCISE  XXXVI 

Thomas  Peters  &  Co.  sustained  a  loss  by  fire  on  December  20.  The  stores  ledger  and  similar  records 
were  totally  destroyed,  therefore,  the  amount  of  the  loss  could  not  be  estimated  from  the  information  which 
these  records  contained.  The  following  facts,  however,  were  obtained  from  the  general  books  and  subsidiary 
records  which  had  been  kept  in  a  safe:  The  inventory  of  merchandise  on  November  30  (preceding)  was 
$75,000.00.    The  purchases  of  merchandise,  which  had  been  received  and  placed  in  stock,  to  December  20, 


228  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

amounted  to  $28,500.00.  The  records  also  showed  that  goods  amounting  to  $34,300.00  had  been  sold  during 
the  first  20  days  of  December,  and  that  the  sales  for  the  past  three  years  had  been  made  at  a  gross  profit 
of  40%. 

The  undamaged  goods  of  the  company  were  inventoried  at  $24,000.00,  and  the  insurance  companies 
settled  the  claim  by  paying  80%  of  the  cost  of  the  goods  damaged  or  destroyed  by  fire.  Determine  the 
amount  of  the  loss  and  make  the  proper  adjusting  entries  to  record  it. 

CONTINGENT  LIABILITIES 
Dishonored  Notes 

If  a  business  discounts  its  notes  receivable,  there  is  always  a  possibility  that  the 
maker  or  makers  of  a  note  which  has  been  discounted  may  fail  to  pay  the  note  at  maturity. 
If  this  occurs  the  party  who  discounted  the  note  becomes  responsible  for  the  payment  of  it. 
In  a  business  which  sells  most  of  its  goods  on  notes  and  makes  a  regular  practice  of 
discounting  them,  it  is  often  necessary  to  create  an  account  for  the  contingent  liabilities 
which  arise  from  the  indorsements  of  discounted  notes. 
This  may  be  done  as  follows : 

At  the  time  a  note  is  discounted,  the  amount  of  it  is  credited  to  an  account  called 
Notes  Receivable  Discounted.  Then,  at  the  time  the  maker  of  the  note  pays  it,  at  the 
bank,  a  journal  entry  may  be  made  which  charges  the  amount  of  the  note  to  the  Notes 
Receivable  Discounted  account  and  credits  it  to  the  Notes  Receivable  account. 

For  example,  let  us  assume  that  a  note  receivable  for  $1,000.00  is  discounted,  at  6%, 
for  60  days,  at  a  bank  and  afterwards  is  paid  by  the  maker;  the  following  entries  may  be 
made  as  the  transactions  occur: 

When  DiscouNTEa> 
Cash  I  990.00 

Interest  10.00 

Notes  Receivable  Discounted  $  1 000 .  00 

When  Paid 
Notes  Receivable  Discounted  $1000.00 

Notes  Receivable  $1000.00 

A  notes  receivable  book,  if  properly  kept,  will  show  the  date  of  maturity  of  each  note, 
and  it  will  show  also  whether  or  not  a  note  has  been  discounted ;  then,  it  is  a  simple  matter 
to  determine  by  inquiring  at  the  bank  whether  or  not  the  maker  of  a  discounted  note  has 
paid  it. 

It  sometimes  happens  that  the  maker  of  a  note  does  not  pay  it  at  maturity.  If  this 
should  occur  in  the  case  of  a  discounted  note,  the  one  who  discounted  the  note  then  becomes 
liable  for  the  pajonent  of  it;  consequently,  the  liability  is  no  longer  contingent,  but  real, 
and  the  one  who  discounted  the  note  must  "take  it  up,"  that  is,  he  must  pay  to  the  bank 
the  amount  of  the  dishonored  note. 

In  addition  to  the  amount  of  the  note  he  may  also  have  to  pay  a  fee  for  protesting  the 
note.  Protest  fees  are  not  charged  on  every  note  or  draft  that  is  dishonored,  but  such 
a  charge  generally  accompanies  the  protesting  of  a  foreign  note  or  draft.  Therefore,  it  is 
important  to  know  how  to  record  a  transaction  of  this  kind. 

For  example,  let  us  assume  that  the  note  receivable  of  the  preceding  illustration  is  not 
paid,  by  the  maker,  at  maturity;  that  there  is  a  protest  fee  of  $2.50  which  has  been  charged 
by  the  bank;  and  that  the  note  has  been  paid  by  the  one  who  discounted  it.  He  may  then 
make  the  following  entry: 


MISCELLANEOUS  ACCOUNTS  229 


When  Paid — After  Protest 


Notes  Receivable  Protested  $  1000 .  00 

Protest  Fees  '  2.60 

Cash  $1002.50 

Or,  he  may  make  this  entry: 

Notes  Receivable  Discounted  $1000.00 

Protest  Fees  2.50 

Cash  $1002.50 

If  the  latter  entry  were  made  it  would  not  record,  in  a  separate  account,  the  amount 
of  the  note  that  has  been  dishonored,  as  the  amount  of  it  will  still  remain  in  the  Notes 
Receivable  account.  The  first  entry  is  preferable,  because  a  note  which  has  been  dishonored 
and  protested  for  nonpayment  does  not  rank  equally  among  the  assets  with  other  notes 
receivable. 

Let  us  assume,  now  that  after  a  short  delay,  the  maker  of  the  note  pays,  in  cash,  the 
protested  note  and  the  protest  fees,  thus  reimbursing  the  indorser;  the  endorser  then  may 
make  the  following  entries: 

Reimbursement  After  Protest 
Cash  $1002.50 

Notes  Receivable  Protested  $  1000 .  00 

Protest  Fees  2.50 

This  entry,  alone,  does  not  record  all  the  facts;  the  payment  of  the  note  by  its  maker 
discharges  all  obligations  on  account  of  the  note  and  the  following  entry  is  necessary  to 
record  these  additional  facts: 

Notes  Receivable  Discounted  $1000.00 

Notes  Receivable  $  1000 .  00 

Now  let  us  assume  that  the  maker  of  the  note  did  not  pay  it  at  maturity,  but  renewed 
the  obligation  by  giving  a  new  note  for  $1,000.00,  and  that  he  paid  the  protest  fees  in  cash. 
These  facts  may  be  recorded  by  the  following  entries: 

Renewal  After  Protest 

Notes  Receivable  (New  note)  $1000.00 

Notes  Receivable  (Old  note)  $1000.00 

Cash  $2.50 

Protest  Fees  $2.50 

This  entry  does  not  record  all  the  facts  in  connection  with  the  transaction.  The 
renewal  of  the  obUgation  by  a  new  note  should  cause  an  adjustment  in  the  accounts  which 
were  affected  by  the  protest  and  payment  of  the  old  note.  These  accounts  may  be  adjusted 
by  the  following  entry : 

Notes  Receivable  Discounted  $1000.00 

Notes  Receivable  Protested  $  1000 .  00 

Sometimes  a  note  receivable  is  not  paid  at  maturity,  but  a  new  note  is  given  to  continue 
the  obUgation.  This  kind  of  a  transaction  is  simply  the  substitution  of  a  new  note  for  an 
old  note,  and  one  account  only  is  affected, — Notes  Receivable. 


230  ■  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

There  are  two  types  of  entries  in  general  use  to  record  a  transaction  of  this  kind.  One 
of  these  entries  follows: 

Notes  Receivable  (New  note) 
Notes  Receivable  (Old  note) 

There  is  an  objection  to  this  type  of  entry  as  the  debit  and  the  credit  are  both  to  one 
account ;  but,  it  is  evident  that  the  new  note  should  be  recorded  and  the  charge  for  the  old 
note  offset,  since  the  charge  for  the  old  note  would  not  represent  the  obligation  on  the 
new  note,  even  though  both  amounts  are  alike. 

The  second  type  of  entry  that  is  sometimes  made  for  the  renewal  of  a  note  follows. 
In  this  transaction  James  Marshall  is  assumed  to  be  the  maker. 

James  Marshall  $500.00 

Notes  Receivable  $500 .  00 

Then  the  following  entry  also  is  made : 

Notes  Receivable  $500.00 

James  Marshall    ,  $500.00 

It  will  be  observed  that  the  first  entry  charges  the  note  to  the  personal  account  of 
the  maker,  and  that  the  second  entry  credits  the  note  to  the  personal  account  of  the  maker. 

It  may  be  that  in  some  cases  the  former  method  is  preferable  while,  in  others,  the 
latter  method  is  preferable. 

Contingent  Liabilities  on  the  Balance  Sheet 

At  the  close  of  a  fiscal  period  it  is  not  unusual  for  the  books  of  a  business  to  show 
all  these  accounts.  When  such  a  condition  exists,  the  amount  of  the  contingent  liabilities, 
■ — Notes  Receivable  Discounted — should  be  deducted  from  the  amount  of  Notes  Receivable 
account  and  the  net  amount  of  the  latter  is  then  extended  into  the  proper  column  of  the 
Balance  Sheet.  Thus  the  treatment  of  these  accounts  is  similar  to  the  treatment  of  a 
property  account  and  its  reserve  for  depreciation. 

The  Protested  Paper  account  is  also  shown  on  the  Balance  Sheet  as  an  asset,  and 
should  be  placed  immediately  following  the  amount  of  the  notes  receivable  Likewise,  the 
account  with  Protest  Fees,  which  is  in  the  nature  of  a  personal  account,  should  be  placed 
on  the  Balance  Sheet  and  included  with  the  accounts  receivable. 

It  should  be  understood  also  that  contingent  liabilities  are  incurred  in  connection  with 
the  indorsement  of  any  kind  of  negotiable  paper  and  that  such  liabilities  may  become  real. 
In  case  the  contingent  liabilities  on  other  forms  of  commercial  paper  become  real,  their 
treatment  would  not  differ  essentially  from  the  treatment  of  dishonored  notes  receivable. 

The  instructions  which  are  given  here  and  which  relate  thus  far  to  notes  receivable 
may  be  applied  similarly  with  reference  to  notes  payable  and  to  mortgages  payable. 

INSTALLMENT  ACCOUNTS  RECEIVABLE 

It  is  a  common  practice  in  many  lines  of  business  to  sell  goods  on  installments,  or 
deferred  payments  as  the  plan  is  sometimes  called.  The  sale  may  be  made  on  open  account 
or  it  may  be  made  on  a  series  of  notes,  each  of  which  matures  at  regular  intervals. 


MISCEIXANEOUS  ACCOUNTS  231 

Such  a  plan  of  selling  goods  does  not  greatly  affect  an  accounting  system  only  insofar 
as  the  personal  accounts  receivable  or  notes  receivable  are  affected  by  it. 

If  the  volume  of  business  is  large  it  is  usually  desirable  to  have  a  specially-ruled  ledger 
made,  and  perhaps  a  specially-ruled  cash  book.  In  the  specially-ruled  cash  book  the 
payments  by  each  customer  may  be  entered;  the  total  of  this  cash  book  is  then  entered 
each  day  in  the  general  cash  book;  consequently,  this  practice  avoids  a  great  number  of 
entries  in  the  general  cash  book. 

The  methods  of  keeping  accounts  receivable  and  notes  receivable  in  an  installment 
business  vary  so  greatly  according  to  the  nature  of  the  business  and  according  to  the 
conditions  on  which  the  sales  are  made,  that  it  can  not  be  fully  treated  in  a  book  of  this 
kind.  Many  concerns  that  sell  goods  on  installments  require  the  purchaser  to  sign  a 
written  contract  of  sale;  on  the  back  of  the  contract  is  a  form  which  corresponds  to  ordi- 
nary ledger  ruling;  and  this  combination  contract  and  ledger  page  is  then  placed  in  a 
binder  which  constitutes  a  loose-leaf  ledger. 

Each  contract  sheet  is  numbered  and  a  summary  of  the  contract  sheets  is  made  at  the 
end  of  a  month,  from  which  the  total  sales  may  be  obtained;  thus,  it  is  seen  that  the  contract 
sheet  becomes  the  original  record  and  a  ledger  page  as  well. 

ASSIGNMENTS  OF  ACCOUNTS  RECEIVABLE 

Sometimes  a  business  man  when  badly  in  need  of  money  will  assign  his  accounts 
receivable  as  security  for  a  loan.  A  simple  method  of  dealing  with  a  transaction  of  this 
kind  is  to  make  entries  that  will  record  the  liability,  and  that  will,  at  the  same  time,  show 
that  certain  accounts  were  assigned.     Such  entries  may  be  as  follows: 

Cash  $1000.00 

Loans  (or  Notes)  Payable  $1000.00 

Accounts  Receivable  Assigned  $1000.00 

Accounts  Receivable  $1000.00 

The  explanation  of  the  second  entry  should  state  in  particular  the  accounts  which 
have  been  assigned.  This  entry  also  removes  from  the  accounts  receivable  the  accounts 
that  have  been  assigned,  since  the  assigned  accounts  no  longer  belong  to  the  assignor,  but 
to  the  person  or  bank  to  which  they  were  assigned. 

Then,  when  a  payment  is  made  on  an  assigned  account,  the  amount  of  the  payment 
is  credited  to  the  proper  account  by  an  entry  similar  to  the  following: 

Cash 

Accounts  Receivable  Assigned 

The  amount  of  the  payment,  or  a  proper  proportion  of  it,  should  be  immediately  for- 
warded to  the  one  from  whom  the  loan  was  obtained,  and  an  entry,  similar  to  the  following, 
may  then  be  made : 

Loans  (or  Notes)  Payable 
Cash 

Accounts  are  generally  assigned  to  individuals  or  to  private  banks  though  some  "regu- 
lar" banks  engage  in  this  practice.  The  terms  of  the  loan  may,  or  may  not,  state  that  the 
persons,  firms,  or  corporations  which  are  indebted  on  the  assigned  accounts  are  to  be 


232 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


notified  of  the  assignment;  but,  in  case  the  terms  of  the  loan  do  provide  that  the  debtors 
on  the  assigned  accounts  shall  be  notified  of  the  assignment  and  that  their  remittances  on 
the  assigned  accounts  shall  be  made  to  the  assignee,  then  the  accounting  would  be  some- 
what affected.  However,  the  entries  that  would  be  made  in  such  an  event  would  be 
similar  to  the  entries  made  when  a  discounted  note  is  paid  at  the  bank  at  which  it  is 
discounted. 

Almost  innumerable  situations  may  arise  in  connection  with  the  assignment  of  accounts 
receivable;  nevertheless,  a  bookkeeper  should  have  but  little  difficulty  if  he  will  only  realize 
the  nature  of  the  obligation  that  has  been  incurred  by  the  assignment,  and  the  effect  of 
such  an  assignment  upon  the  accounts  assigned. 


SUPPLEMENTARY    EXERCISES 

DIRECT  METHOD  OF  CLOSING  A  LEDGER 

In  former  years  it  was  the  general  custom  to  close  the  ledger  by  what  is  commonly 
called  the  direct  method.  By  this  method  of  closing  the  ledger  journal  entries  are  not 
used,  but  an  amount  that  is  sufficient  to  close  the  account  is  written  (in  red  ink)  on  the 
smaller  side  of  the  account ;  then,  an  equal  amount  is  written  (in  black  ink)  on  the  opposite 
side  of  the  Profit  &  Loss  account  or  other  account  into  which  the  former  account  is  being 
closed. 

Inventories  are  also  written,  in  red  ink,  in  the  accounts  that  are  affected  by  the  inven- 
tories; then,  after  the  accounts  are  closed  the  inventories  are  brought  down,  in  black  ink, 
on  the  opposite  side  of  the  accounts.  Thus,  the  inventory  of  merchandise  would  be  written 
first  on  the  credit  side  of  the  Purchases  account  and  after  the  account  is  closed  the  amount 
of  the  inventory  would  be  brought  down  on  the  debit  side  of  the  Purchases  account,  unless 
an  Inventory  account  is  kept,  in  which  case  the  amount  of  the  inventory  would  appear 
as  a  debit  in  the  latter  account.     All  other  inventories  are  handled  in  a  similar  manner. 

For  example:  It  is  desired  to  close  the  Sales  account  into  the  Profit  &  Loss  account. 
An  amount  is  written  on  the  debit  side  of  the  Sales  account  and  an  equal  amount  is  written 
on  the  credit  side  of  the  Profit  &  Loss  account.  This  is,  in  effect,  a  journal  entry,  but 
as  an  entry  it  is  not  recorded  in  a  book  of  original  entry. 

There  are,  however,  those  who  desire  to  close  the  ledger  by  the  direct  method,  and 
this  method  is  illustrated  by  the  following  accounts: 


Sales 


Purchases 


Inventory 


P.  «fe  L.  5000.00 


Selling  Expense 


5000.00         6000.00    Invt.  3000.00 

I  P.  &  L.  3000.00 

General  Expense 


3000.00 


Administrative  Expense 


400.00 


P.  &  L.  400.00 


200.00    P.&L.    200.00 


300.00 


P.  &  L.  .300.00 


Profit  &  Loss 

Purchases 

3000.00 

Sales     5000.00 

S.Exp. 

400.00 

G.  Exp. 

200.00 

Adm.  Exp. 

300.00 

H.  B. 

550.00 

G.  B. 

550.00 

. 

H.  Brown, 

Proprietor 

2000.00 

P.&L. 

550.00 

G.  Brown,  Proprietor 

2000.00 
P.  &  L.  550.00 


SUPPLEMENTARY  EXERCISES 


233 


The  accounts,  which  are  affected  by  the  closing,  are  then  balanced  and  ruled  just  as 
if  journal  entries  had  been  used  to  close  them;  the  balances  are  brought  down  in  the 
proprietors'  accounts  also: 

EXERCISE  XXXVII 

Prepare  proper  accounts  in  a  ledger  for  the  following  accounts  and  then  close  them  by  the  direct 
method:  Sales  $15,000.00,  Purchases  $12,000.00,  Discount  on  Sales  $200.00,  Discount  on  Purchases 
$100.00,  Selling  Expense  $2,000.00,  and  General  Expense  $1,000.00.  The  inventory  of  merchandise  is 
$4,000.00. 

INCOME  TAX  RETURNS 

Any  plan  of  bookkeeping,  provided  it  is  based  upon  sound  accounting  principles, 
should  readily  furnish  all  information  that  is  demanded  by  the  Income  Tax  Law  of  the 
United  States. 

The  general  plan  of  the  (individual)  income  tax  return  is  to  report;  first,  the  income 
from  the  major  source,  showing  also  the  expenses  of  the  business;  second,  to  show  the 
minor  income  or  incomes  (if  any)  that  have  been  received  during  the  fiscal  period  (year). 

The  list  of  expenses  which  are  reported  under  "Other  Business  Deductions"  does  not 
correspond  to  the  usual  classifications  of  expense,  that  are  used  in  business;  but,  no  great 
difficulty  will  be  experienced  in  re-classifying  the  expenses  to  meet  the  requirement  of  the 
return.  A  re-classification  of  expenses,  by  analysis,  may  be  made  to  conform  to  this 
report. 

The  form  which  is  shown  here  is  known  as  the  Individual  Income  Tax  Return,  Form 
1040  A.  If  sufficient  space  is  not  provided  on  the  return,  a  schedule  that  contains  the 
necessary  information  may  be  made;  and  the  schedule,  properly  marked  to  identify  it, 
may  be  attached  to  the  return  at  the  proper  place.  A  schedule  attached  to  the  return  is 
commonly  called  a  "rider." 

There  are  various  forms  upon  which  returns  may  be  made  by  tax  payers.  All  the 
forms,  however,  are  similar  in  principle,  but  some  of  the  forms  which  are  adapted  to  the 
use  of  individuals  under  certain  conditions  or  to  certain  types  of  business  organization  as 
follows:  individuals  with  incomes  over  $5,000.00,  partnerships,  corporations,  etc.,  are 
larger  and  therefore  contain  more  space  for  explanatory  matter.  It  is  sometimes  necessary 
to  attach  riders  to  these  larger  returns  in  order  to  show  in  detail  some  matter  that  requires 
explanation. 

Income  tax  blanks  are  furnished  by  the  government  through  the  Bureau  of  Internal 
Revenue  and  each  blank  has  attached  to  it  a  work  sheet  which  should  be  filled  out  by  the 
taxpayer,  detached,  and  kept  by  him  for  reference.  In  compiling  the  return,  it  is  advis- 
able to  prepare  the  work  sheet  first,  then,  copy  it  on  the  return  after  which  the  latter 
should  be  attested  by  a  notary  public  and  mailed  to  the  office  of  the  United  States  Collector 
of  Internal  Revenue  for  the  district  in  which  the  taxpayer  lives. 


CALCULATION  OF  TAX 


$ 

P.  Tax  due  (4%  on  amount  of  Item  0)  

$ 

N.  Less  personal  exemption  (see  Instruction  VII) 

Q  Less  normal  tax  of  2%  on  amount  of  Item  F . 

$ 

s 

$       

NOTE.— If  the  amount  on  line  0  exceeds  $4,00 
at  8%,  and  your  return  should  be  made  on  Forn 

0,  the  excess  U  taxable 

I  1040. 

234 

Page  2  of  Relcm 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


INDIVIDUAL  RETURN  OF  TAXABLE  INCOME 


Inctmlnif 


of  wife  (er  Iratbukd)  and  dependent  duomX 
jnlcss  reported  in  teperate  retorns  / 


A.  INCOME  FROM  BUSINESS  OR  PROFESSION. 


1.  Kind  of  business __«._. .  ,...„... .■..■■■ .    2.  Business  address. 

3.  Total  sales  and  income  Iran  bosiness  or  professional  services „..__ 

COST  OF  GOODS  SOLD: 

4.  Labor 


6.  Material  and  supplies 

e.  Uerchandise  bought  for  sale.. 

7.  Other  costs 

8.  Plus  Inventories  at  beginning  of  year 


9.  Total !$. 


10.  Less  Inventories  at  end  of  year 

11.  Net  Cost  o»  Goods  Sold '$ 


OTHER  BUSINESS  DEDUCTIONS: 

12.  Salaries  and  wages  not  reported  as 
"X^ibor"  under  "Cost  of  Goods  Sold" 

13.  Bent  on  business  property  in  which 

taxpayer  has  no  equity 

14.  Interest  on  business  indebtedness  to 

otlieis 


15.  Taxes  on  business  and  business  property 

16.  Repairs,  wear  and  tear,  and  property 

17.  Bad  debts  arising  from  sales  or  profes- 

sional services  • . 


18.  Other  expenses  (attach  classified  state- 
ment)  


% 


19.  Total  (Items  12  to  18  inclusive) . 

20.  Net  Cost  Plus  Total  Dedttctioiis  (Item  11  plus  Item  19). 

21.  Net  Incomb  trom  BtrsTNTSg  or  PnorEBSioy  (Item  3  minus  Item  20)  .. ]% 


B.  INCOME  FROM  SALARIES,  WAGES,  COMMISSIONS,  BONUSES,  DIREaOR'S  FEES  AND  PENSIONS. 

t 

1.  By  whom  received. 

2.  Occupation. 

3.  Name  and  address  0.' employer. 

4.  Amount 
received. 



Salary  to  self  and  dependent  minor  children  in 

eluded  in  any  dedoctioo  in  Schodole  A . 

T^TAL  iNCOira  PEOM  EaLARIE."),  tTC 

C.  INCOME  FROM  PARTNERSHIPS.  PERSONAL  SERVICE  CORPORATIONS,  AND  HDUOARIES  REPORTING  ON  A  CALENDAR  TEAR  BASIS 

(not  including  amounts  reported  under  F  and  K). 
(State  name  and  address  of  partnership,  etc.) 

$ 

D.  PROFIT  FROM  SALE  OF  LAND.  BUILDINGS,  STOCKS.  BONDS  AND  OTHER  PROPERH,  AND  FROM  UQUIDATING  DIVinENDS. 

$ 

1.  Kind  of 
property. 

2.  Name  of  purchaser  or  broker. 

3.  Sale  price  or 
liquidating 
dividends. 

4.  Data 
acquired. 

5.  Cost  or  market  value 

Mar.  1, 1913,  if  acquired 

prior  thereto. 

6.  CostofEubsa- 
quent  improve- 
ments, if  any. 

7.  Depreciation 

subsequently   ' 

sustained. 

S 

t 

%    

t .  . 

Net  Psorrr  (total  of  cols.  3  and  7  minus  total 
of  cols.  5  and  6) 

1 

t 

S 

t 

E.  INCOME  FROM  RENTS  AND  ROYALTIES. 


1.  Kind  of  property. 


2.  Name  and  address  of  tenant,  lessee,  etc 


Net  Income  trom  Rents  and  RoTAi.Tn:.<!  (total  of  col.  3  minus  total-of  cols.  4  and  5).  S S— f. $ 


3.  Amount  (cash 
or  equivalent) 


5.  Other  expenses. 


F.  INTEREST  ON  CORPORATION  BONDS  CONTAINING  TAX-FREE  COVENANT,  ON  WHICH  A  TAX  OF  2  J^  WAS  PAID  BY  DEBTOR  CORPORATION! 

(including  such  faterest  received  through  partnerships,  personal  servico  corporations  ami  fiduciaries  reporting  on  calendar  year  basis^ I<- 


G.  OTHER  INCOME  (not  including  dividends,  which  should  be  reported  in  Item  K). 


Amount  paid  for  yon  by  debtor  corporation  on  tax-tree  covenant  bonds  (Item  Q,  page  I). 


Amount  received. 


Total $. 


H.  TOTAL  NET  INCOME  FROM  ABOVE  SOURCES i$- 


I.  GENERAL  DEDUCTIONS  NOT  INCLUDED  ABOVE. 


1.  Interest  paid  on 
indebtedness.. 


2.  Taxes  paid  ■- 


3.  Losses  by  fire,  storm,  or  cas- 
ualty not  claimed  above  . 


4.  Contributions. 


5.  Bad  debts  and  other  deductions, 
ilany  (attachdetailedstatement)ll. 


J.  Total  net  income  on  which  nomul  tax  is  to  he  calculated  (H  nnnas  I)  (Enter  as  Item  M,  page  1) . . $.. 

K.  Cash  or  Stock  DivideniU  from  coiporalioiis  whidi  are  taxable  by  Ibe  United  Stales  upon  any  portion  of  tbeir  net  incomes  (including  dividends  re- 
ceived tlirough  partnerships,  personal  service  corporations,  and  fiduciaries  reporting  on  a  calendar  year  basis)  .  L_ 

L,  Total  net  bcooM  (if  this  aqiount  is  over  15.000.  make  your  return  on  Form  1040) $- 

a— 9397 


SUPPLEMENTARY  EXERCISES  235 

EXERCISE  XXXVIII 


William  F.  Bartlett 

Profit  and  Loss  Statement  for  Year  ended  Dec.  31,  19. . 

... 

Sales 

$35,000.00 

Inventory  Jan.  1,  19 — . 

$  4,500.00 

P*urchases  during  year 

28,200.00 

Freight-In 

220.00 

Total  Purchases  $32,920.00 

Less:     Inventory  Dec.  31,  19—.  4,800.00 


Cost  of  Goods  Sold  $28,120.00 


Gross  Profit  $6,880.00 

Expense  3,64000 


Net  Profit  ■  $  3,240.00 

An  analysis  of  the  Expense  accoimt  showed  that  it  was  composed  of  the  following  items:  wages,  $1300; 
rent,  $1500;  interest  on  notes  payable,  $24.00;  taxes,  $85.00;  depreciation,  $125.00;  bad  debts,  $110.00; 
miscellaneous  expense,  such  as,  telephone,  postage,  electric  light,  heat,  attorney's  fees,  etc.,  $496.00. 

In  addition  to  his  other  income  Bartlett  derived  income  from  the  following  sources:  he  was  secretary 
of  a  club  that  paid  him  $250.00  per  year.  He  owned  a  house  that  rented  for  $50.00  per  month,  and  that 
cost  him  as  follows  during  the  year:  taxes,  $86.00;  insurance,  $12.50;  repairs,  $21.80;  interest  on  mortgage, 
$240.00. 

Bartlett  is  married,  and  has  two  children  under  18  years  of  age;  prepare  a  return  for  him,  and  calculate 
the  amount  of  tax  that  he  should  pay.     The  form  for  the  calculation  of  the  tax  is  given  on  page  233 

WORK  SHEET 

Accountants  and  auditors  frequently  employ  a  device  which  is  known  as  a  work 
sheet  and  which  is  usually  one  or  more  sheets  of  journal  paper  containing  a  total  of  ten 
amount  columns. 

The  illustration  on  pages  236  and  237  shows  a  work  sheet. 

There  are  other  forms  for  work  sheets;  but,  the  one  most  commonly  used  is  the 
form  shown  in  this  illustration. 

Let  us  assume  that  the  trial  balance  (on  the  work  sheet)  on  Dec.  31  is  correct; 
but,  that  certain  adjustments  in  the  accounts  are  necessary  and  advisable.  These  adjust- 
ments should  be  made  in  accordance  with  the  following  facts:  An  analysis  of  the  Freight 
account  showed  that  Freight-In  amounted  to  $700.00  and  that  Freight-Out  amounted  to 
$200.00.  An  analysis  of  Expense  showed  that  it  was  composed  of  the  following  accounts: 
Salaries,  $5,000.00;  Rent,  $2,000.00;  Miscellaneous  Expense,  $1,500.00. 

The  Inventory  of  Merchandise  on  Dec.  31,  amounted  to  $8,000.00;  Accrued  Interest 
on  notes  receivable  amounted  to  $50.00;  and  Deferred  Advertising  amounted  to  $100.00. 

The  following  journal  entries  are  then  made  to  provide  for  the  adjustments: 

(a)  Freight-In  $500.00 
Freight-Out  200.00 

Freight  $700.00 

(b)  Salaries  $5000.00 

Rent  2000.00 

Miscellaneous  Expense  1500.00 

Expense  18500.00 


236 


LYONS'  BOOKKEEPING  AND  ACCOUNTING 


ILLUSTRATION  OF 


C.  S.  Cooke 
Work  Sheet  for  the  current 


Trial  Balance 

December  31 

Adjustments 

Cash 

1500 

00 

Notes  Rec. 

2000 

00 

Accounts  Rec. 

6000 

00 

Mdse.  Inventory 

7000 

00 

(c)           1000 

00 

Office  Equipment 

1000 

00 

Store  Equipment 

2000 

00 

Notes  Payable 

1500 

00 

Accounts  Payable 

2500 

00 

C.  S.  Cooke,  Proprietor 

10800 

00 

C.  S.  Cooke,  Personal 

200 

00 

Sales 

75000 

00 

Purchases 

60000 

00 

(c)           1000 

00 

Freight 

700 

00 

(a)             700 

00 

Expense 

8500 

00 

(b)           8500 

00 

Advertising 

900 

00 

(e)             100 

00 

Freight-In 

>. 

(a)             500 

00 

Freight-Out 

(a)             200 

00 

Salaries 

(b)           5000 

00 

Rent 

(b)           2000 

00 

Miscellaneous  Exp)en8e 

(b)           1500 

00 

Accrued  Interest 

(d)               50 

00 

Interest 

(d)               50 

00 

Deferred  Expense 

(e)             100 

00 

89800 

00 

89800 

00 

10350 

00 

10350 

00 

(c) 

Mdse.  Inve 

atory 

$1000.00 

Purchases 

$1000.00 

(d) 

Accrued  Interest 
Interest 

$50.00 

$50.00 

(e) 

Deferred  Expense 

$100.00 

Adver 

.ising 

$100.00 

These  journal  entries  are  then  posted  to  the  proper  accounts,  but  in  the  columns 
headed  "Adjustments",  and  after  the  balance  of  each  account  is  obtained,  the  balance  is 
extended  into  the  columns  headed  "Adjusted  Trial  Balance."  Then  all  the  accounts  on 
the  adjusted  trial  balance  are  extended  into  the  proper  columns  according  to  whether  the 
account  should  appear  on  the  Profit  and  Loss  Statement  or  on  the  Balance  Sheet.  Of 
course  it  should  be  remembered  that  each  account  that  appears  on  the  adjusted  trial  balance 
must  be  placed  in  one  or  the  other  of  these  reports. 


SUPPLEMENTARY  EXERCISES 


237 


A  WORK  SHEET 


year  ended  Dec.  31  ^  19 — 


Adjusted  Trial  Balance 
December  31 

Profit  and  Loss 
Statement 

Balance  Sheet 

1500 
2000 
6000 
8000 
1000 
2000 

200 
59000 

800 

500 

200 

5000 

2000 

1500 

50 

100 

00 
00 
00 
00 
00 
00 

00 
00 

00 
00 
00 
00 
00 
00 
00 

00 

1500 

2500 

10800 

75000 
50 

00 
00 
00 

00 
00 

59000 

800 

500 

200 

5000 

2000 

1500 

00 

00 
00 
00 
00 
00 
00 

75000 
50 

00 
00 

1500 
2000 
6000 
8000 
1000 
2000 

200 

50 
100 

00 
00 
00 
00 
00 
00 

00 

00 
00 

1500 

2500 

10800 

00 
00 
00 

89850 

00 

89850 

00 

69000 

00 

75050 

00 

20850 

00 

14800 

00 

After  the  work  sheet  has  been  completed  and  the  Trading  and  Profit  and  Loss 
Statement  and  the  Balance  Sheet  have  been  made,  the  journal  entries  may  then  be  recorded 
in  the  journal  and  posted  to  the  ledger;  this  will  cause  the  ledger  to  show  the  same  results 
that  are  shown  by  the  work  sheet.  The  ledger  should  then  be  closed  and  ruled  in  the 
usual  manner. 

Devices  similar  to  this  may  be  used  by  bookkeepers  to  prepare  reports  or  to  prove  the 
work  in  certain  books.  In  fact,  the  resourceful  bookkeeper  seldom  meets  a  situation  that 
he  can  not  overcome  in  some  manner. 


EXERCISE  XXXIX 

Prepare  a  Trading  and  Profit  and  Loss  Statement  and  a  Balance  Sheet  from  the  results  shown  by  the 
work  sheet.    Then,  prepare  proper  closing  journal  entries  to  record  the  results  which  have  been  obtained. 


238  LYONS'  BOOKKEEPING  AND  ACCOUNTING 

m 

GOODWILL 

The  question  of  the  valuation  of  goodwill  seldom  arises  except  in  connection  with  the 
sale  of  a  business.  The  factors  which  are  said  to  produce  goodwill  are  favorable  reputation, 
good  location,  and  perhaps  trade  names  or  brands  that  have  become  household  words. 

In  the  purchase  of  a  going  business  it  is  a  common  practice  to  call  the  amount  paid, 
in  excess  of  the  assets  purchased,  goodwill.  For  example:  A  purchases  a  business  from  B 
for  $10,000.00,  but  the  value  of  all  assets  purchased  is  only  $8,000.00.  The  difference, 
$2,000.00,  is  said  to  be  goodwill,  and  in  opening  a  set  of  books  for  A  this  amount  ($2,000.00) 
would  be  charged  to  Goodwill  account. 

This  account  is  an  asset;  but- when  a  Balance  Sheet  is  prepared  Goodwill  should  not 
be  included  in  any  of  the  various  classes  of  assets  that  have  been  discussed  in  this  book, 
but  it  should  stand  as  an  unclassified  asset. 

Goodwill  may  depreciate  or  it  may  increase  in  value  from  year  to  year.  As  to  whether 
or  not  the  bookkeeping  records  should  show  the  fluctuations  in  the  value  of  this  asset, 
there  is  considerable  difference  of  opinion.  It  is  perhaps  a  good  plan  to  provide  a  reserve 
for  it,  and  thus  accumulate  a  sufficient  amount  to  "write  it  off"  the  books.  In  doing  this, 
however,  an  amount  equal  to  the  credit  to  the  reserve  each  fiscal  period  should  not  be 
charged  to  expenses  as  such  a  charge  to  expense  would  not  be  permissible  under  the  Income 
Tax  Law.  But,  after  the  taxable  income  had  been  determined  and  before  the  net  profit 
is  distributed  to  the  partners  or  credited  to  a  sole  proprietor,  an  amount  equal  to  the 
reserve  may  be  charged  to  the  Profit  &  Loss  account.  This  procedure,  of  course,  has  the 
effect  of  reducing  the  net  profits  for  the  period  and  ultimately  of  reducing  the  net  capital 
of  the  proprietor  or  proprietors. 

EXERCISE  XL 

N.  A.  Townsend  owns  a  business  which  he  desires  to  sell.  The  following  is  a  statement  of  the  assets 
(at  book  value)  which  he  offers  for  sale: 

Notes  and  Accounts  Receivable  (Good)  $2250.00 

Stock  of  Goods  -  3450.00 

Store  Equipment  1250.00 

He  offered  these  assets  and  the  goodwill  of  the  business  for  $8,000.00,  and  the  business  was  purchased 
by  A.  H.  Sells  who  now  asks  you  to  open  a  set  of  books  for  him.  By  the  terms  of  sale  Sells  is  to  pay  $5,000.00 
cash  and  give  three  notes  for  $1,000.00  each,  payable  respectively  in  6  months,  9  months,  and  12  months. 
Make  the  necessary  entries  to  record  the  purchase  of  the  business  by  Sells. 

A  similar  question  may  arise  for  the  vendor  of  a  business.  For  example :  A  may  sell  his 
business,  which  includes  assets  amounting  to  $4,500.00,  for  $6,000.00.  The  difference 
between  these  amounts,  $1,500.00,  must  represent  the  value  placed  upon  the  goodwill  of 
the  business  by  the  purchaser.  It  is  a  profit  to  A  since  he  has  received  $1,500.00  in  excess 
of  the  tangible  assets  that  he  sold;  therefore,  this  amount  may  be  credited  to  the  Profit  & 
Loss  account  or  it  may  be  credited  to  the  capital  account  of  the  proprietor,  as  it  would  be 
a  rather  unusual  procedure  to  credit  a  Goodwill  account  in  such  a  case. 


INDEX 


PAGES 

Abbreviations 12,  19,  35,  53,  180 

Acceptances 166,  168 

Account,  defined  5 

Accounting  Devices 141 

Accounts     Affecting     Purchases     and     Sales 

Accounts 101 

Accounts  Payable 5,  69 

Accounts  Payable  Ledger 146 

Accounts  Receivable 5,  69 

Accounts  Receivable  Ledger 146 

Accrued  Assets 125,  159 

Accrued  Liabilities 126,  160 

Advertising 99,  100,  116 

Advertising  Account.    99 

Allowances  on  Merchandise 23 

Analysis  of  Accounts 93 

Ascertaining  profit  and  loss 67,  78 

Assets,  classified 125 

Assets,  defined 12 

Assignment  of  Accounts  Receivable 231 

Automobile  Agency 151 

Availibility  of  Assets 127 

Bad  Debts  Account 177 

Balance 5 

Balance  and  Ruling  Accounts .  8,  14,  24,  25,  28,  37, 

83,  85,  87,  95,  96.  99,  100,  176,  177 

Balance  Sheet 12 

Balance  Sheet,  Form  of 70,  127 

Balance  Sheet,  Aid  in  Financing 129 

Bank  Acceptance 1 70 

Bank  Reconciliation 113,  116 

Bank  Statement 1 13 

Bill 20 

Billing 109.  187 

Bookkeeping,  defined 5 

Capital,  Proprietor's 12,  69 

Card  Ledger 150 

Cash  Account 37 

Cash  Book 39 

Cash,  distinguished  from  profits 132 

Cash  Proof 43 

Certified  Check 153 

Charts 219 

Check  Book  Stub 108 

Check,  Illustration  of 36 

Checking  Amounts 07, 186 

Checking  the  Trial  Balance 67 

Classification  of  Books 29 

Closing  Diagram ^ 58,  1 17 

Closing  the  Ledger 54,  71,  232 

Closing  and  Ruling  Accounts 55,  56,  57.  224 

Closing  and  Ruling  Books 31,  35,  161,  200 

Closing  Journal  Entries .-55,  56,  57,  71 

Closing  Special  Column  Cash  Book .lil,.161 


PACKS 

Coal  Business .- 59 

C.  O.  D.  Sales 191,  198 

Comparative  Statements 78,  218,  219,  220 

Comparative  Statistics 218 

Contingent  Liabilities 228,  230 

Controlling  Accounts. .    147 

Correcting  Errors 53 

Corrections  and  Adjustments ; 49 

Cost  of  Doing  Business 217 

Cost  of  Goods  Sold 26,  55,  67,  116 

Cost  Records 150,  204,  205 

Credit  Memorandum 21 

Current  Assets  125 

Current  Liabilities 125 

Debit  and  Credit 5 

Debiting  and  Crediting  accounts,  Rule  for. ...     52 

Deferred  Assets 125 

Deferred  Charges 97 

Deferred  Expense 97 

Deferred  Expense,  How  to  Provide  for 100 

Deferred  Liabilities 126 

DeUvery  Equipment  Account 96 

Departments 202 

Departmental  Accounting 203 

Depositing 109 

Depreciation 172,  224 

Depreciation  Account 173 

Discounts 101,  102,  103,  104,  157 

Double  Entry,  defined 29 

Drafts 166 

Endorsement 81,  189.  191 

Errors  in  a  Ledger,  Correction  of 53 

Errors  in  Books  of  Original  Entry,  Correction  of    53 

Errors  in  Trial  Balance,  How  to  Locate 66 

Exchange 184 

Expense  Account 18 

Expenses  Classified 99,  135 

Explanations  in  a  Journal 44 

FUing,  Notes 107,  113 

Fmal  Entry,  Book  of 29 

Fiscal  Period  12 

Fixed  Assets 125 

Fixed  Liabilities 126 

F.  O.  B 104 

Forwarding  a  Sales  Book 75,  184 

Forwarding  an  Account 8 

Freight-Out  Account 104 

Freight-In  Account 105 

Freight  Charges,  Schedule  of 204 

Fruit  and  Produce  Business 73 

General  Expense — See  Expense. 

Goodwill 238 

Graphic  Illustrations ;. .....  219 


239 


240 


INDEX— Continued 


PAGES 

Hardware  Business 87 

How  Transactions  Affect  the  Business 140 

Income  Classified 134 

Income  Tax  Law 12,  233 

Insurance  Account 98 

Interest  Account 97 

Installment  Accounts 230,  231 

Inventory  by  Accounting 206 

Inventory,  Definition  of 21 

Inventory,  Physical 21 

Inventory,  Perpetual,  Book  or  Going 21 

Inventory  Account 25 

Invoice 20 

Journal 44 

Journalizing,  Oral  Exercises  in 52,  72,  78,  93 

Journal  Entries,  How  made 44 

Journal  Entries  Illustrated .  45,  46,  47,  48,  49,  50,  51 

Journal,  Use  of  in  Opening  Books 48 

Journal,  Use  of  in  Corrections,  Transfers,  etc . .     49 

Land  and  Buildings  Account 221,  222,  225 

Ledger  Accounts,  Posting  to. 29,  32,  39,  44,  161,  185 

Ledger,  Illustrated 62,  63,  64,  65 

Liabilities,  Classified 125 

Liabilities,  Defined 12 

Loose  Leaf  Books 150,  182 

Loss  and  Gain 16 

Loss  on  Accounts  Receivable 176 

Losses  from  Fire 226 

Mechanical  Appliances 151 

Memorandum  Books 148 

Merchandise  Accounts 23 

Miscellaneous  Accounts 226 

Monthly  Statements 22,  200,  216 

Mortgage  on  Real  Property 223 

Net  Capital  of  Proprietor 69 

Notes 80 

Notes  Payable  Account 84 

Notes  Payable  Book 148 

Notes  Receivable  Account 82 

Notes  Receivable  Book 148 

Office  Equipment  Account 95 

Opening  Books 48 

Opening  an  Account 76 

Order,  Form  of 20 

Order  Register 183 

Original  Entry,  Books  of 29 

Overhead 217 

Partnership 15 

Partnership,  Dissolution  of 91 

Pass  Book 109 

Paying  by  Check 108 

Percentage  of  Profit 79,  218,  219 

Personal  Accounts 5 

Petty  Cash  Book 207 


PAGES 

Piano  Business 107 

Posting 29,  32,  39,  44,  185,  186 

Price  Lists 108,  188 

Problems,  Supplementary.  .6,  13,  16,  17,  23,  24,  26, 
28,  36,  81,  83,  85,  97,  101,  102,  103,  123,  173,  226 

Profit  and  Loss 16 

Profit  and  Loss  Statement 68,  134,  137 

Promissory  Notes 80 

Proof  Sheet ! 70 

Proof  of  Inventory 206 

Proof  of  Statements 70 

Property  Expense  and  Income  Account 223 

Property  Used  in  the  Business 94 

Proprietor's  Capital  Account 13 

Proprietor's  Personal  Account 86 

Provision  for  Depreciation  and  Losses. .    ..  172,  177 
Purchases  Book 29 

Real  Estate 221 

Receipt Ill 

Recapitulation 165,  184 

Reconcihation 113 

Reserves 174,  179 

Reserve  for  Depreciation  of  Office  Equipment 

Account 176 

Reserve    for    Loss   on    Accounts    Receivable 

Account 178 

Returned  Merchandise 23 

Rules  for  Journalizing 52 

Sales  Book 32 

Set  I : 59 

Set  II 73 

Set  III 87 

Set  IV 107 

SetV 151 

Set  VI 181 

Sight  Drafts 166 

Special  Columns.  .141,  142,  143,  144,  145,  152,  187 

Statement  of  Assets  and  Liabilities 69 

Statements,  Monthly  to  Customers 113 

Statistical  Information 78 

Stores  Record  (Ledger) 150,  201 

Subsidiary  Ledgers 146 

Summary  of  Distribution  of  Profits 79 

Supplementary  Exercises 119,  232 

Supplementary  Journalizing 52,  72,  78.  93 

Terms  of  Sale 30,  101,  187 

Test  Ledgers 58,  118,  162,  164 

Time  Drafts 168 

Trade  Acceptances 171 

Trading  Statement 116,  134 

Transposition  of  Figures ^ 66 

Trial  Balance 29,  66,  72 

Wholesale  Accounting  181 

Work  Sheet 235 


YD   I  1 433 


